J. Pan and A.M. Poteshman: The Information in Option Volume for Stock Prices

September 4, 2003

We find strong evidence that option trading volume contains information about future stock price movements. Taking advantage of a unique dataset from the ChicagoBoard Options Exchange, we construct put to call ratios for underlying stocks, using volume initiated by buyers to open new option positions. Performing daily cross-sectional analyses from 1990 to 2001, we find that buying stocks with low put/call ratios and selling stocks with high put/call ratios generates an expected return of 40basis points per day and 1 percent per week.