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The Information Content of Option Ratios

29 Pages Posted: 17 May 2013 Last revised: 1 Feb 2016

Benjamin M. Blau

Utah State University - Huntsman School of Business

Nga Nguyen

Marquette University

Ryan J. Whitby

Utah State University - Huntsman School of Business

Date Written: 2014

Abstract

A broad stream of research shows that information flows into underlying stock prices through the options market. For instance, prior research shows that both the Put-Call Ratio (P/C) and the Option-to-Stock Volume Ratio (O/S) predict negative future stock returns. In this paper, we compare the level of information contained in these two commonly used option volume ratios. Our comparison of the return predictability contained in these ratios yields some new results. First, we find that P/C ratios contain more predictability about future stock returns at the daily level than O/S ratios. Second, in contrast to our first set of results, O/S ratios contain more predictability about future returns at the weekly and monthly levels than P/C ratios. In fact, our tests show that while P/C ratios contain predictability about future daily returns and, to some extent, future weekly returns, the return predictability in P/C ratios is fleeting. O/S ratios, on the other hand, significantly predict negative returns at both the weekly and monthly levels, respectively.

Keywords: Put-Call Ratios, Option Volume-to-Stock Volume Ratio, Informed Trading, Return Predictability

Suggested Citation

Blau, Benjamin M. and Nguyen, Nga and Whitby, Ryan J., The Information Content of Option Ratios (2014). Journal of Banking and Finance, Vol. 43, 2014. Available at SSRN: https://ssrn.com/abstract=2266073 or http://dx.doi.org/10.2139/ssrn.2266073

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Nga Nguyen

Marquette University ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Ryan J. Whitby

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435.797.9495 (Phone)

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