Center of Volume Mass: Does Options Trading Predict Stock Returns?

76 Pages Posted: 8 Jan 2020

See all articles by Gennaro (帅纳) Bernile

Gennaro (帅纳) Bernile

University of Miami - Department of Finance

Fei Gao

Singapore Institute of Technology

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business

Date Written: December 17, 2019

Abstract

We examine whether the distribution of trades along the set of strike prices of option contracts on the same stock contains information about underlying price discovery. We show that option traders' demand for delta exposure drives the volume-weighted average strike-spot price ratio (VWKS). In turn, we find that VWKS predicts underlying returns and anticipates the flow of fundamental information about the stock. The return predictability is greater but not limited to stocks with higher information asymmetries and arbitrage costs, and becomes stronger ahead of value relevant news. Overall, options trading appears to play an important informational role for underlying markets.

Keywords: Options, Volume, Return predictability, Information, Center of mass

JEL Classification: G11, G12, G14, G17

Suggested Citation

Bernile, Gennaro (帅纳) and Gao, Fei and Hu, Jianfeng, Center of Volume Mass: Does Options Trading Predict Stock Returns? (December 17, 2019). University of Miami Business School Research Paper No. 3505045. Available at SSRN: https://ssrn.com/abstract=3505045 or http://dx.doi.org/10.2139/ssrn.3505045

Gennaro (帅纳) Bernile

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Fei Gao

Singapore Institute of Technology ( email )

10 Dover Dr
Singapore
Singapore, 138683
Singapore

Jianfeng Hu (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
(+65) 68085477 (Phone)

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