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The Performance of Trading Strategies based on the Ratio of Option and Stock Volume

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  • Han-Ching Huang
  • Bo-Sheng Wu

Abstract

Based on Johnson and So [11], we construct a portfolio based on the ratio of trading volume of the stock option to its underlying stock (O/S). We compare the profitability of the OS strategy with those of 52-week highs, trading volume, and price momentum strategies to examine whether OS investment returns are more profitable. We find that the longer holding period is associated with the better the OS strategy to earn returns. Thus, the OS strategy is more suitable for long-term investment. The return of the OS strategy is higher than that of the trading volume strategy. The longer the holding period, the greater the gap is. In long-term investment, return of OS strategy is higher than that of the 52-week high and price momentum strategy. Given the investment period is more than one year, we find that the OS strategy can indeed help investors make profits, and its return is higher than other strategies.  JEL classification numbers: G11, G12 Keywords: OS strategy, 52-week highs strategy, trading volume strategy, and price momentum strategy, option volume

Suggested Citation

  • Han-Ching Huang & Bo-Sheng Wu, 2020. "The Performance of Trading Strategies based on the Ratio of Option and Stock Volume," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 10(4), pages 1-9.
    • Handle: RePEc:spt:apfiba:v:10:y:2020:i:4:f:10_4_9
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    References listed on IDEAS

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    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. Markus Glaser & Martin Weber, 2003. "Momentum and Turnover: Evidence from the German Stock Market," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 55(2), pages 108-135, April.
    3. 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.
    4. repec:bla:jfinan:v:59:y:2004:i:5:p:2145-2176 is not listed on IDEAS
    5. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    6. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2010. "O/S: The relative trading activity in options and stock," Journal of Financial Economics, Elsevier, vol. 96(1), pages 1-17, April.
    7. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
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    Cited by:

    1. Han-Ching Huang & Chien-Sheng Wen, 2021. "The Performance of Trading Strategies Based on Deviations from Put-Call Parity of Stock Options," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 11(2), pages 1-3.
    2. Han-Ching Huang & Guan-Yu Chen, 2024. "The Performance Analysis of Trading Strategies Based on Insider Silence," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 14(2), pages 1-4.

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    More about this item

    Keywords

    os strategy; 52-week highs strategy; trading volume strategy; and price momentum strategy; option volume;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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