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

TLDR

The paper investigates how option trade volume signals information by developing an asymmetric‑information model in which informed traders may trade in options or equities. The authors test the model’s hypotheses using intraday option trading data. The study finds that informed traders trade options under specific conditions, that negative and positive option volumes carry information about future stock prices, and that this links option and equity markets.

Abstract

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.