Excess Returns to Buying Low Options-Volume Stocks and Selling High Options-Volume Stocks: Information or Characteristics?

The Journal of Futures Markets, 2018

Posted: 14 Aug 2018

See all articles by Li Cai

Li Cai

Illinois Institute of Technology - Stuart School of Business, IIT

Jian Du

University of Massachusetts Amherst

Date Written: July 16, 2018

Abstract

This paper documents a negative relationship between options trading volume and stock returns. The relationship is remarkably robust and cannot be explained by existing asset-pricing theorems. We find that strategies that require buying stocks with low options trading volume in the past and selling stocks with high options trading volume in the past generate significant positive abnormal returns. Further analysis indicates that the pattern mostly represents a characteristic effect, in which options trading predicts stock returns through its relationship with determinant characteristics such as beta, illiquidity, and idiosyncratic volatility.

Keywords: options trading volume, prediction, market efficiency, characteristic

JEL Classification: G12

Suggested Citation

Cai, Li and Du, Jian, Excess Returns to Buying Low Options-Volume Stocks and Selling High Options-Volume Stocks: Information or Characteristics? (July 16, 2018). The Journal of Futures Markets, 2018. Available at SSRN: https://ssrn.com/abstract=3214838

Li Cai (Contact Author)

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

Chicago, IL 60661
United States

Jian Du

University of Massachusetts Amherst ( email )

MA
United States

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