Does Option Trading Convey Stock Price Information?

Jianfeng Hu;

RELATED

Related Papers     Patents    Grants    Venues    Experts    Cite    Share    Save

ABSTRACT

Motivated by the growing literature on options as non-redundant assets, we investigate how option trading impacts underlying stock prices in the cross section controlling for stock market activities. We find both option trades and quotes are able to predict future stock price movement but stock orders submitted by stock market investors do not have predictive ability. The predictive relations do not reverse at longer horizons, suggesting that the price impact of option trading is due to revelation of private information rather than transitory price pressure as a result of option market makers’ delta hedging activity in the stock market. Consistently, this informational benefit from option trading increases in concentration of informed traders, difficulty of short selling, and options market activeness. Trading strategies based on option trading signals yield significant abnormal returns that cannot be explained by common risk factors.

 Paraphrase     Questionfy     Wikify     Simplify     Summarize

Download