The Informational Role of Stock and Option Volume

39 Pages Posted: 26 Jul 1999

See all articles by Kalok Chan

Kalok Chan

CUHK Business School

Y. Peter Chung

University of California at Riverside

Wai Ming Fong

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: June 1999

Abstract

This paper analyzes the intraday interdependence of price movements and order flows for actively traded NYSE stocks and their CBOE-traded options. Stock net-buy volume (buyer-initiated volume minus seller-initiated volume)has strong predictive ability for subsequent stock and option returns, but call or put net-buy volume has little predictive ability. Furthermore, stock returns lead option returns more than they lag even after controlling for net-buy volume. Therefore, our results indicate that order flows in the stock market are informative but order flows in the option market are not, and suggest that informed investors submit trades primarily in the stock market rather than in the option market. There is also some evidence for the non-informational linkage between the two markets. Stock net-buy volume is positively (negatively) related to lagged call (put) returns, suggesting that option dealers dynamically hedge their outstanding short option positions when the option deltas change. However, call or put net-buy volume is not correlated with stock net-buy volume or lagged stock returns, suggesting that option traders do not use options for hedging or at least do not readjust their hedged positions frequently.

JEL Classification: G12, G14

Suggested Citation

Chan, Kalok and Chung, Y. Peter and Fong, Wai Ming, The Informational Role of Stock and Option Volume (June 1999). Available at SSRN: https://ssrn.com/abstract=170356 or http://dx.doi.org/10.2139/ssrn.170356

Kalok Chan (Contact Author)

CUHK Business School ( email )

Hong Kong
852 3943 9988 (Phone)

Y. Peter Chung

University of California at Riverside ( email )

900 University Avenue
Riverside, CA 92521
United States
909-787-3906 (Phone)
909-787-2933 (Fax)

Wai Ming Fong

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

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