The Informational Role of Options Trading: Evidence from the Shanghai Stock Exchange 50ETF Options in China

59 Pages Posted: 9 Jul 2021

See all articles by Teng Ma

Teng Ma

Tsinghua University, PBC School of Finance, Students

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: June 27, 2021

Abstract

This study empirically investigates the effects of options trading on future stock returns. Leveraging the Shanghai Stock Exchange 50 exchange-traded fund (50ETF) options trading data in China, we show that put-call ratios, skewness ratios, and China's Volatility Index exhibit economically and statistically significant predictability for the expected returns of the 50ETF in the time series. We also show that a simple market timing strategy based on the above indicators can effectively improve annualized returns and reduce the corresponding risk. We conclude that options trading contains useful information about the future price movements of the underlying asset.

Keywords: Put-call ratios, skewness ratios, China VIX Index, variance risk premium, stock return predictability, market timing

JEL Classification: C32, C53, G12, G13

Suggested Citation

Ma, Teng and Zhang, Xiaoyan, The Informational Role of Options Trading: Evidence from the Shanghai Stock Exchange 50ETF Options in China (June 27, 2021). Available at SSRN: https://ssrn.com/abstract=3874855 or http://dx.doi.org/10.2139/ssrn.3874855

Teng Ma (Contact Author)

Tsinghua University, PBC School of Finance, Students ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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