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The Information Content of Option Demand

Author

Listed:
  • Kerstin Kehrle

    (Independent)

  • Tatjana Xenia Puhan

    (University of Mannheim and Swiss Life Asset Managers)

Abstract

This paper combines the concept of market sidedness with excess option demand (changes in open interest) to solve the empirical challenge of separating directional from uninformed trading motives in widely available, unsigned options data. Our measure of options market sidedness persistently predicts the sign and strength of stock returns. Trading strategies conditional on the measure are highly profitable. For instance, when the measure indicates positive (negative) information, out-of-the-money calls (puts) generate returns of 27% (32%) over roughly four weeks. Risk-adjusted returns of a long-short equity strategy yield more than 2%. An increase in directionally informed demand predicts a decrease in option liquidity and increases in pricing inefficiency.

Suggested Citation

  • Kerstin Kehrle & Tatjana Xenia Puhan, 2012. "The Information Content of Option Demand," Swiss Finance Institute Research Paper Series 12-43, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1243
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    File URL: http://ssrn.com/abstract=2005763
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    More about this item

    Keywords

    Option Demand; Market Sidedness; Open Interest; Liquidity; Market Microstructure;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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

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