Option Volume and Stock Prices: Evidence on Where Informed Traders Trade

doi:10.1111/0022-1082.194060

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Wiley InterScience

The Journal of Finance

Volume 53 Issue 2, Pages 431 - 465

Published Online: 17 Dec 2002

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Option Volume and Stock Prices: Evidence on Where Informed Traders Trade

David Easley , Maureen O'Hara & P.S. Srinivas

¹ Department of Economics, Cornell University, ² Johnson Graduate School of Management, Cornell University, ³ The World Bank

ABSTRACT

This paper investigates the informational role of transactions volume in options markets. We develop an asymmetric information model in which informed traders may trade in option or equity markets. We show conditions under which informed traders trade options, and we investigate the implications of this for the linkage between markets. Our model predicts an important informational role for the volume of particular types of option trades. We empirically test our model's hypotheses with intraday option data. Our main empirical result is that negative and positive option volumes contain information about future stock prices.

DIGITAL OBJECT IDENTIFIER (DOI)

10.1111/0022-1082.194060 About DOI