Option Skills
50 Pages Posted: 29 Nov 2017 Last revised: 21 Apr 2020
Date Written: April 8, 2020
Abstract
We contribute to the debate on whether institutional investors have an information advantage in a novel way – by investigating institutional options holdings. We find that net institutional option holdings predict both future abnormal stock returns and earnings surprises, particularly for stocks with more opaque public information environments. The return predictability in net option holdings stems from the negative information reflected in institutions’ put positions, and is orthogonal to other variables that may contain similar information (short interest and signed option trading imbalances). We find that institutions use put options as complements, rather than the often-posited substitute for short selling.
Keywords: Institutional Trading, Informed Traders, Options Markets
JEL Classification: G14, G20
Suggested Citation: Suggested Citation