Center of volume mass: Does options trading predict stock returns?

Author

Gennaro BERNILE, University of Miami
Fei GAO, Singapore Management UniversityFollow
Jianfeng HU, Singapore Management UniversityFollow

Publication Type

Working Paper

Version

publishedVersion

Publication Date

12-2019

Abstract

We examine whether the distribution of trades along the set of strike prices of option contracts on the same stock contains information about underlying price discovery. We show that option traders' demand for delta exposure drives the volume-weighted average strike-spot price ratio (VWKS). In turn, we find that VWKS predicts underlying returns and anticipates the flow of fundamental information about the stock. The return predictability is greater but not limited to stocks with higher information asymmetries and arbitrage costs, and becomes stronger ahead of value relevant news. Overall, options trading appears to play an important informational role for underlying markets.

Keywords

Options, Volume, Return predictability, Information, Center of mass

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

First Page

1

Last Page

76

Citation

BERNILE, Gennaro; GAO, Fei; and HU, Jianfeng. Center of volume mass: Does options trading predict stock returns?. (2019). 1-76.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6568

Copyright Owner and License

Authors

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Comments

Presented at the 8th Conference on Financial Markets and Corporate Governance, 19 - 21 April 2017, Wellington, New Zealand

Additional URL

https://doi.org/10.2139/ssrn.3505045