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The informational role of forex option volume

Author

Listed:
  • Bao, Kun
  • Chen, Denghui
  • Gu, Chen
  • Papakroni, Erlina
  • Stan, Raluca
  • Wang, Muhan

Abstract

This paper investigates the effect of foreign exchange (FX) option trading volume on the underlying EUR/USD futures market. Our in-sample and out-of-sample tests show that the FX put-call volume ratio can predict future exchange rate changes. Greater put-call volume ratios predict a depreciation of the Euro relative to the US dollar. The predictability is prevalent in times of high uncertainty in the FX market, and is stronger during crisis than non-crisis periods. We use a predictive regression forecast model based on the put-call ratio to propose a trading strategy that performs better than the simple strategy of buying and holding Euros, or than the strategy of trading based on the prevailing mean forecast method. Overall, trading volume in the FX option market seems to facilitate information flow into the underlying FX futures market.

Suggested Citation

  • Bao, Kun & Chen, Denghui & Gu, Chen & Papakroni, Erlina & Stan, Raluca & Wang, Muhan, 2025. "The informational role of forex option volume," International Review of Financial Analysis, Elsevier, vol. 100(C).
    • Handle: RePEc:eee:finana:v:100:y:2025:i:c:s1057521925000651
    DOI: 10.1016/j.irfa.2025.103978
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    More about this item

    Keywords

    Put-call ratio; Information; Foreign exchange market; Options; Futures; Trading volume;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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