IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v69y2023i8p4810-4827.html
   My bibliography  Save this article

Option Trading Activity, News Releases, and Stock Return Predictability

Author

Listed:
  • David Weinbaum

    (Whitman School of Management, Syracuse University, Syracuse, New York 13244)

  • Andrew Fodor

    (College of Business, Ohio University, Athens, Ohio 45701)

  • Dmitriy Muravyev

    (Broad College of Business, Michigan State University, East Lansing, Michigan 48824)

  • Martijn Cremers

    (Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

Abstract

We examine which categories of option trading volume carry information about future stock prices around corporate news announcements. We predict and find that purchases of options are informative on news days and ahead of unscheduled events but not before scheduled events, and sales of options predict returns only ahead of scheduled news releases. Therefore, although the arrival of new information is an important reason why option volume predicts stock returns, this relation depends on whether the information is scheduled or unscheduled because only the former affects volatility and thus option prices. We also study how trading costs and margin costs affect ex post profitability around news.

Suggested Citation

  • David Weinbaum & Andrew Fodor & Dmitriy Muravyev & Martijn Cremers, 2023. "Option Trading Activity, News Releases, and Stock Return Predictability," Management Science, INFORMS, vol. 69(8), pages 4810-4827, August.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:8:p:4810-4827
    DOI: 10.1287/mnsc.2022.4543
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2022.4543
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2022.4543?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Johnson, Travis L. & So, Eric C., 2012. "The option to stock volume ratio and future returns," Journal of Financial Economics, Elsevier, vol. 106(2), pages 262-286.
    2. Chan, Konan & Ge, Li & Lin, Tse-Chun, 2015. "Informational Content of Options Trading on Acquirer Announcement Return," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(5), pages 1057-1082, October.
    3. Turan G. Bali & Armen Hovakimian, 2009. "Volatility Spreads and Expected Stock Returns," Management Science, INFORMS, vol. 55(11), pages 1797-1812, November.
    4. Back, Kerry, 1993. "Asymmetric Information and Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 435-472.
    5. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 175-205.
    6. Brennan, Michael J & Cao, H Henry, 1996. "Information, Trade, and Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 163-208.
    7. Charles Cao & Zhiwu Chen & John M. Griffin, 2005. "Informational Content of Option Volume Prior to Takeovers," The Journal of Business, University of Chicago Press, vol. 78(3), pages 1073-1109, May.
    8. Dmitriy Muravyev, 2016. "Order Flow and Expected Option Returns," Journal of Finance, American Finance Association, vol. 71(2), pages 673-708, April.
    9. Patell, Jm & Wolfson, Ma, 1981. "The Ex Ante And Ex Post Price Effects Of Quarterly Earnings Announcements Reflected In Option And Stock-Prices," Journal of Accounting Research, Wiley Blackwell, vol. 19(2), pages 434-458.
    10. Santa-Clara, Pedro & Saretto, Alessio, 2009. "Option strategies: Good deals and margin calls," Journal of Financial Markets, Elsevier, vol. 12(3), pages 391-417, August.
    11. Jun Pan & Allen M. Poteshman, 2006. "The Information in Option Volume for Future Stock Prices," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 871-908.
    12. Hendershott, Terrence & Livdan, Dmitry & Schürhoff, Norman, 2015. "Are institutions informed about news?," Journal of Financial Economics, Elsevier, vol. 117(2), pages 249-287.
    13. Kumar, Raman & Sarin, Atulya & Shastri, Kuldeep, 1992. "The Behavior of Option Price around Large Block Transactions in the Underlying Security," Journal of Finance, American Finance Association, vol. 47(3), pages 879-889, July.
    14. Byeong-Je An & Andrew Ang & Turan G. Bali & Nusret Cakici, 2014. "The Joint Cross Section of Stocks and Options," Journal of Finance, American Finance Association, vol. 69(5), pages 2279-2337, October.
    15. Muravyev, Dmitriy & Ni, Xuechuan (Charles), 2020. "Why do option returns change sign from day to night?," Journal of Financial Economics, Elsevier, vol. 136(1), pages 219-238.
    16. Tarun Chordia & Bhaskaran Swaminathan, 2000. "Trading Volume and Cross‐Autocorrelations in Stock Returns," Journal of Finance, American Finance Association, vol. 55(2), pages 913-935, April.
    17. Andrew Dubinsky & Michael Johannes & Andreas Kaeck & Norman J Seeger, 2019. "Option Pricing of Earnings Announcement Risks," The Review of Financial Studies, Society for Financial Studies, vol. 32(2), pages 646-687.
    18. Boulland, Romain & Dessaint, Olivier, 2017. "Announcing the announcement," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 59-79.
    19. Gao, Chao & Xing, Yuhang & Zhang, Xiaoyan, 2018. "Anticipating Uncertainty: Straddles around Earnings Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(6), pages 2587-2617, December.
    20. Cao, H Henry, 1999. "The Effect of Derivative Assets on Information Acquisition and Price Behavior in a Rational Expectations Equilibrium," The Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 131-163.
    21. Lin, Tse-Chun & Lu, Xiaolong, 2015. "Why do options prices predict stock returns? Evidence from analyst tipping," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 17-28.
    22. Simon Gervais & Ron Kaniel & Dan H. Mingelgrin, 2001. "The High‐Volume Return Premium," Journal of Finance, American Finance Association, vol. 56(3), pages 877-919, June.
    23. Xintong (Eunice) Zhan & Bing Han & Jie Cao & Qing Tong, 2022. "Option Return Predictability," The Review of Financial Studies, Society for Financial Studies, vol. 35(3), pages 1394-1442.
    24. Edward Xuejun Li & K. Ramesh & Min Shen & Joanna Shuang Wu, 2015. "Do Analyst Stock Recommendations Piggyback on Recent Corporate News? An Analysis of Regular‐Hour and After‐Hours Revisions," Journal of Accounting Research, Wiley Blackwell, vol. 53(4), pages 821-861, September.
    25. Dmitriy Muravyev & Neil D Pearson & Stijn Van Nieuwerburgh, 2020. "Options Trading Costs Are Lower than You Think," The Review of Financial Studies, Society for Financial Studies, vol. 33(11), pages 4973-5014.
    26. Anna Scherbina & Bernd Schlusche, 2020. "Follow the Leader: Using the Stock Market to Uncover Information Flows between Firms [Trade credit and cross-country predictable firm returns]," Review of Finance, European Finance Association, vol. 24(1), pages 189-225.
    27. Engelberg, Joseph E. & Reed, Adam V. & Ringgenberg, Matthew C., 2012. "How are shorts informed?," Journal of Financial Economics, Elsevier, vol. 105(2), pages 260-278.
    28. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    29. Patell, James M. & Wolfson, Mark A., 1979. "Anticipated information releases reflected in call option prices," Journal of Accounting and Economics, Elsevier, vol. 1(2), pages 117-140, August.
    30. Xing, Yuhang & Zhang, Xiaoyan & Zhao, Rui, 2010. "What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 641-662, June.
    31. Cremers, Martijn & Weinbaum, David, 2010. "Deviations from Put-Call Parity and Stock Return Predictability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 335-367, April.
    32. Ge, Li & Lin, Tse-Chun & Pearson, Neil D., 2016. "Why does the option to stock volume ratio predict stock returns?," Journal of Financial Economics, Elsevier, vol. 120(3), pages 601-622.
    33. Ekkehart Boehmer & Charles M Jones & Juan (Julie) Wu & Xiaoyan Zhang, 2020. "What Do Short Sellers Know?," Review of Finance, European Finance Association, vol. 24(6), pages 1203-1235.
    34. Barber, Brad M. & De George, Emmanuel T. & Lehavy, Reuven & Trueman, Brett, 2013. "The earnings announcement premium around the globe," Journal of Financial Economics, Elsevier, vol. 108(1), pages 118-138.
    35. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    36. Wen Jin & Joshua Livnat & Yuan Zhang, 2012. "Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage?," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 401-432, May.
    37. Michelle Lowry & Marco Rossi & Zhongyan Zhu, 2019. "Informed Trading by Advisor Banks: Evidence from Options Holdings," The Review of Financial Studies, Society for Financial Studies, vol. 32(2), pages 605-645.
    38. Patrick Augustin & Menachem Brenner & Marti G. Subrahmanyam, 2019. "Informed Options Trading Prior to Takeover Announcements: Insider Trading?," Management Science, INFORMS, vol. 65(12), pages 5697-5720, December.
    39. Przemysław S. Stilger & Alexandros Kostakis & Ser-Huang Poon, 2017. "What Does Risk-Neutral Skewness Tell Us About Future Stock Returns?," Management Science, INFORMS, vol. 63(6), pages 1814-1834, June.
    40. Biais, Bruno & Hillion, Pierre, 1994. "Insider and Liquidity Trading in Stock and Options Markets," The Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 743-780.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen, Chin-Ho & Yuan, Shu-Fang, 2024. "Misreaction, hedging pressure, and its effect on the futures market," Pacific-Basin Finance Journal, Elsevier, vol. 86(C).
    2. 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).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gkionis, Konstantinos & Kostakis, Alexandros & Skiadopoulos, George & Stilger, Przemyslaw S., 2021. "Positive stock information in out-of-the-money option prices," Journal of Banking & Finance, Elsevier, vol. 128(C).
    2. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Orłowski, Piotr & Subrahmanyam, Marti G., 2022. "Informed options strategies before corporate events," LawFin Working Paper Series 39, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    3. Augustin, Patrick & Brenner, Menachem & Grass, Gunnar & Orłowski, Piotr & Subrahmanyam, Marti G., 2023. "Informed options strategies before corporate events," Journal of Financial Markets, Elsevier, vol. 63(C).
    4. Liu, Dehong & Qiu, Qi & Hughen, J. Christopher & Lung, Peter, 2019. "Price discovery in the price disagreement between equity and option markets: Evidence from SSE ETF50 options of China," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 557-571.
    5. Jie Cao & Amit Goyal & Xiao Xiao & Xintong Zhan, 2023. "Implied Volatility Changes and Corporate Bond Returns," Management Science, INFORMS, vol. 69(3), pages 1375-1397, March.
    6. Wu, Zekun & Borochin, Paul & Golec, Joseph, 2024. "Informed options trading before FDA drug advisory meetings," Journal of Corporate Finance, Elsevier, vol. 84(C).
    7. Suresh Govindaraj & Yubin Li & Chen Zhao, 2020. "The effect of option transaction costs on informed trading in the options market around earnings announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(5-6), pages 615-644, May.
    8. Chen, Zhuo & Lu, Andrea, 2017. "Slow diffusion of information and price momentum in stocks: Evidence from options markets," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 98-108.
    9. Davide E Avino & Enrique Salvador, 2024. "Contingent Claims and Hedging of Credit Risk with Equity Options," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(2), pages 310-348.
    10. Da‐Hea Kim, 2022. "Investment horizon and option market activity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 923-958, May.
    11. Khorram, Mehdi & Mo, Haitao & Sanger, Gary C., 2023. "Information flow and credit rating announcements," Journal of Financial Markets, Elsevier, vol. 65(C).
    12. Kelley Bergsma & Andy Fodor & Vijay Singal & Jitendra Tayal, 2020. "Option trading after the opening bell and intraday stock return predictability," Financial Management, Financial Management Association International, vol. 49(3), pages 769-804, September.
    13. Zhou, Yi, 2022. "Option trading volume by moneyness, firm fundamentals, and expected stock returns," Journal of Financial Markets, Elsevier, vol. 58(C).
    14. Alejandro Bernales & Thanos Verousis & Nikolaos Voukelatos & Mengyu Zhang, 2020. "What do we know about individual equity options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 67-91, January.
    15. Delisle, R. Jared & Lee, Bong Soo & Mauck, Nathan, 2012. "The dynamic relation between short sellers, option traders, and aggregate returns," MPRA Paper 42566, University Library of Munich, Germany.
    16. Chin‐Ho Chen, 2021. "Investor sentiment, misreaction, and the skewness‐return relationship," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(9), pages 1427-1455, September.
    17. Bing Han & Gang Li, 2021. "Information Content of Aggregate Implied Volatility Spread," Management Science, INFORMS, vol. 67(2), pages 1249-1269, February.
    18. Amit Goyal & Alessio Saretto, 2022. "Are Equity Option Returns Abnormal? IPCA Says No," Working Papers 2214, Federal Reserve Bank of Dallas.
    19. Chichernea, Doina & Huang, Kershen & Petkevich, Alex & Teterin, Pavel, 2024. "Options trading imbalance, cash-flow news, and discount-rate news," Journal of Empirical Finance, Elsevier, vol. 77(C).
    20. Doojin Ryu & Heejin Yang, 2018. "The directional information content of options volumes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1533-1548, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:69:y:2023:i:8:p:4810-4827. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.