TA1: Option and Stock Market

Information
If you have private information about a stock,
which market you would like to trade, options
or stocks?

Information
Jun and Poteshman (2006) The Information in Optio
n Volume for Future Stock Prices Review of Financi
al Studies , volume 19, pages 871--908, 2006
Stocks with high put call ratios earn lower returns tha
n stocks with low put call ratios.

Stock Prices on Options Expiration day

Percentage of optionable stocks closing within 0.25 of a strike price.

Why do stock prices cluster on expiration da

ys
Firm proprietary investors manipulate the stoc
k price toward strike
Market maker delta hedge rebalance.

SP500 index puts returns and demand

OTM puts

ATM puts

ITM puts

-14.65%

-9.5

-6.16

t-Statistic

(-4.22)

(-2.81)

(-2.54)

Minimum

-84.03

-87.72

-85.98

Maximum

475.88

228.57

174.7

Mean BS beta

-36.85

-31.11

-26.53

202,519

59,530

22,457

Weekly mean return (%)

Non-market maker net

demand (long short)

Q: Why do investors buy an assets with average negative returns ?

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Mean Negative Returns

Is market predictable ?
Dependent: future 3 months S&P500 returns
Constant

2.59

Constant

6.43

t-statistics

(3.98)

(1.95)

Demand
OTMput

-70.88

t-statistcs

(-4.55)

R2

0.19

PE ratio -180.74

Constant -2.83

(-1.07)

Div
Yield

224.47

(-1.51)
0.02

Constant

1.11

(1.17)

VIX
36.1
premium

(1.78)
0.02

(0.64)
0.01

Which stocks have higher future return

s than the others (Anomaly)
1. Stocks with low open buy put call ratios
2. Small stocks (size)
3. Stocks with high book to market ratios (value) (3 5 year
s)
4. More profitable firms (positive profits) (profitability)

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Which stocks have higher future return

s than the others (Anomaly)
5. Firms that invest less (growth)
6. Stocks with low accruals (accruals)
7. Stocks with low net issues (net issue)
8. Stocks with high past returns (momentum) ( up to 1 yea
r)

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Summary
Options trading
1. Tells us cross sectional differences in fut
ure stock returns (information)
2. Influences the stock prices on expiration
days
3. Give us a guide of future market movem
ents

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