Do Option Open-Interest Changes Foreshadow Future Equity Returns?

29 Pages Posted: 4 Jul 2010 Last revised: 15 Jul 2010

See all articles by Andy Fodor

Andy Fodor

Ohio University

Kevin Krieger

University of West Florida

James Doran

University of New South Wales

Multiple version iconThere are 2 versions of this paper

Date Written: January 13, 2010

Abstract

Recent work has considered whether information is simultaneously reflected in both option and equity markets. We provide new evidence supporting Black’s (1975) conjecture that information is first revealed in option markets. Specifically, changes in call and put open interest levels have predictive power for future equity returns. Large increases in put open interest are followed by poor equity returns. Call open interest increases precede relatively strong future returns but the relationship is considerably less pronounced. The recent change in the call-to-put open interest ratio most strongly predicts equity returns over the following few weeks, even after controlling for traditional factors.

Suggested Citation

Fodor, Andy and Krieger, Kevin and Doran, James, Do Option Open-Interest Changes Foreshadow Future Equity Returns? (January 13, 2010). Available at SSRN: https://ssrn.com/abstract=1634065 or http://dx.doi.org/10.2139/ssrn.1634065

Andy Fodor (Contact Author)

Ohio University ( email )

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Kevin Krieger

University of West Florida ( email )

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Pensacola, FL 32514-5750
United States

James Doran

University of New South Wales ( email )

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Sydney, NSW 2052
Australia

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