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Topics: Stock market, Futures contract, Stock Pages: 32 (4755 words) Published: October 5, 2014
The Society for Financial Studies

The Information in Option Volume for Future Stock Prices
Author(s): Jun Pan and Allen M. Poteshman
Source: The Review of Financial Studies, Vol. 19, No. 3 (Autumn, 2006), pp. 871-908 Published by: Oxford University Press. Sponsor: The Society for Financial Studies. Stable URL: http://www.jstor.org/stable/3844016 .

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The
Stock

Information

in

Option

Volume

for

Future

Prices

Jun Pan
MIT Sloan School of Management

and NBER

Alien M. Poteshman
University of Illinois at Urbana-Champaign
We presentstrong
evidencethatoptiontrading
volumecontainsinformation
about
future
stock prices.Taking advantage of a unique data set, we construct put-call
ratiosfrom
to
Stockswithlow
optionvolumeinitiated buyers open newpositions.
by
stockswithhigh put-callratios by more than 40 basis
put-callratios outperform
our
pointson thenextday and morethan1% overthenextweek.Partitioning option we
thatare publiclyand nonpublicly
observable, findthat
signalsinto components
is
the economic source of this predictability nonpublicinformation possessed by
We
option tradersratherthan marketinefficiency. also findgreaterpredictability forstockswithhigher
of
concentrations informed
traders
and from
optioncontracts
withgreater
leverage.

This article examines the informational content of option trading for future movements in underlying stock prices. This topic addresses the fundamental economic question of how information gets incorporated into asset prices and is also of obvious practical interest. Our main goals are to establish the presence of informed trading in the option market and also to explore several key issues regarding its nature.

Our focus on the informational role of derivatives comes at a time when derivatives play an increasingly important role in financial markets. Indeed, for the past several decades, the capital markets have experienced an impressive proliferation of derivative securities, ranging from equity options to fixed-income derivatives to, more recently, credit derivatives. Eileen

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