Option Volume and Stock Prices: Evidence on Where Informed Traders Trade

Journal of Finance, Vol. 53, No. 2, April 1998

Posted: 2 Jul 1998

See all articles by David Easley

David Easley

Cornell University - Department of Economics; Cornell University - Department of Information Science

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

P. S. Srinivas

World Bank

Abstract

This paper investigates the informational role of transactions volume in options markets. We develop an asymmetric information model in which informed traders may trade in option or equity markets. We show conditions under which informed traders trade options, and we investigate the implications of this for the linkage between markets. Our model predicts an important informational role for the volume of particular types of option trades. We empirically test our model's hypotheses with intra-day option data. Our main empirical result is that negative and positive option volumes contain information about future stock prices.

JEL Classification: G13, G14

Suggested Citation

Easley, David and O'Hara, Maureen and Srinivas, P. S., Option Volume and Stock Prices: Evidence on Where Informed Traders Trade. Journal of Finance, Vol. 53, No. 2, April 1998. Available at SSRN: https://ssrn.com/abstract=98724

David Easley

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-6283 (Phone)
607-255-2818 (Fax)

Cornell University - Department of Information Science ( email )

402 Bill & Melinda Gates Hall
Ithaca, NY 14853
United States

Maureen O'Hara (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

P. S. Srinivas

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

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