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Technical trading with open interest: evidence from the German market

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  • Thorben Manfred Lubnau
  • Neda Todorova

Abstract

This article investigates whether options' open interest can be incorporated successfully into technical trading strategies. A set of 2040 trading rules is applied to the German index DAX 30 and to the 10 German stocks with the highest market capitalization. The results show that open interest rules, when combined with information from the spot market, can improve the predictive power of technical trading rules. Both put and call open interest appear to contain information regarding future equity prices while the open interest differential performs very poorly. Best results are achieved for the DAX index, showing economically significant profits even when transaction costs are taken into account whereas the results are more mixed for individual options. Across all assets, out-of-the-money (OTM) calls and in-the-money (ITM) puts exhibit the strongest forecasting power for the utilized rules.

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  • Thorben Manfred Lubnau & Neda Todorova, 2012. "Technical trading with open interest: evidence from the German market," Applied Financial Economics, Taylor & Francis Journals, vol. 22(10), pages 791-809, May.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:10:p:791-809
    DOI: 10.1080/09603107.2011.627210
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    Cited by:

    1. Avinash & T. Mallikarjunappa, 2020. "Informational Role of Open Interest and Transaction Volume of Options: A Meta-Analytic Review," FIIB Business Review, , vol. 9(4), pages 275-285, December.
    2. S. Narend & M. Thenmozhi, 2019. "Do Country ETFs Influence Foreign Stock Market Index? Evidence from India ETFs," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(1_suppl), pages 59-86, April.
    3. 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.
    4. Michael Soucek & Neda Todorova, 2013. "Economic significance of oil price changes on Russian and Chinese stock markets," Applied Financial Economics, Taylor & Francis Journals, vol. 23(7), pages 561-571, April.

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