Does Option Trading Convey Stock Price Information

By Jianfeng Hu. 2014

219 citations recorded by the source corpus.

After executing option orders, options market makers turn to the stock market to hedge away the underlying stock exposure. As a result, the stock exposure imbalance in option transactions translates into an imbalance in stock transactions. This paper decomposes the total stock order imbalance into an imbalance induced by option transactions and an imbalance independent of options. The analysis shows that the option-induced imbalance significantly predicts future stock returns in the cross section controlling for the past stock and options returns, but the imbalance independent of options has only a transitory price impact. Further investigation suggests that options order flow contains important information about the underlying stock value.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/d2de5e3fef3374489744436df353e440a76f8ff7

Citations in the corpus

• The Bright Side of Financial Derivatives: Options Trading and Firm Innovation (2016, unknown): “…that options increase the amount of private information conveyed by prices (e.g., Cao, 1999; Chakravarty, Gulen, and Mayhew, 2004; Pan and Poteshman, 2006; Roll, Schwartz, and Subrahmanyam, 2009; Hu, 2014), we may expect that this rationale also applies in the context of active options markets.”
• Informed trading and price discovery before corporate events (2015, unknown): “Hu (2014) shows that options market makers hedge the inventory risk by short selling the underlying stock. Data on the availability of exchange-listed options for sample firms are obtained from the EuronextParis BDM database. The third measure is based on a unique institutional feature on Euronext-P”