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O/S: The Relative Trading Activity In Options And Stock

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Executive Summary

While many studies have focused on trading volume in the stock market, little is known about why derivatives volume varies in the cross-section or over time. The authors study time-series properties as well as the determinants of the options/stock trading volume ratio (O/S) using a comprehensive cross-section and time-series of data on equities and their listed options. O/S is related to many intuitive determinants such as delta and trading costs, and it also varies with institutional holdings, analyst following, and analyst forecast dispersion. O/S is higher around earnings announcements (suggesting increased trading in the options market), and higher O/S predicts lower abnormal returns after the earnings announcement, suggesting that options trading improves market efficiency.

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