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Option trading volume by moneyness, firm fundamentals, and expected stock returns

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  • Zhou, Yi

Abstract

I examine the link between option and equity markets by considering the informational content of the option trading volume with respect to moneyness and maturity when the trade direction is unobserved. A high option trading volume of all maturity terms, deep-in-the-money put options, and deep-out-of-the-money call options, predicts higher leverage, increases in default risk, negative earnings surprises, and decreases in future profitability. In addition, option trading volume negatively predicts future stock returns. Information diffusion from the option market to equities plays an important role in accounting for return predictability in option trading volume. Such predictability is less evident in stocks with high institutional ownership and more analyst coverage.

Suggested Citation

  • Zhou, Yi, 2022. "Option trading volume by moneyness, firm fundamentals, and expected stock returns," Journal of Financial Markets, Elsevier, vol. 58(C).
    • Handle: RePEc:eee:finmar:v:58:y:2022:i:c:s1386418121000306
    DOI: 10.1016/j.finmar.2021.100648
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    Cited by:

    1. Yuan, Jianglei & Liu, Dehong & Chen, Carl R. & Hu, Sen, 2024. "Option trading volume and the cross-section of option returns," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    2. Sumit Saurav & Sobhesh Kumar Agarwalla & Jayanth R. Varma, 2024. "Role of derivatives market in attenuating underreaction to left‐tail risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(3), pages 484-517, March.
    3. Sumit Saurav & Sobhesh Kumar Agarwalla & Jayanth R. Varma, 2023. "Belief distortion near 52W high and low: Evidence from Indian equity options market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(11), pages 1531-1558, November.
    4. Dammak, Wael & Hamad, Salah Ben & de Peretti, Christian & Eleuch, Hichem, 2023. "Pricing of European currency options considering the dynamic information costs," Global Finance Journal, Elsevier, vol. 58(C).

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    More about this item

    Keywords

    Cross section of stock returns; Options; Option trading volume; Information diffusion;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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