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1 – 10 of 10Recent studies suggested the ratio of option to stock volume reflected the private information. Informed traders were drawn to the options market for its leverage effect and…
Abstract
Purpose
Recent studies suggested the ratio of option to stock volume reflected the private information. Informed traders were drawn to the options market for its leverage effect and relatively low transaction costs. Informed traders use different intervals of option moneyness to execute their strategies. The question is which types of option moneyness were traded by informed traders and what information was reflected in the market. In this study, the authors focused on this question and constructed a method for capturing the activity of informed traders in the options and stock markets.
Design/methodology/approach
The authors constructed the daily measure, moneyness option trading volume to stock trading volume ratio (MOS), to capture the activity of informed traders in the market. The authors formed quintile portfolios sorted with respect to the moneyness option to stock trading volume ratio and provided the capital asset pricing model and Fama–French five-factor alphas. To determine whether MOS had predictive ability on future stock returns after controlling for company characteristic effects, the authors formed double-sorted portfolios and performed Fama–Macbeth regressions.
Findings
The authors found that the firms in the lowest moneyness option trading volume to stock trading volume ratio for put quintile outperform the highest quintile by 0.698% per week (approximately 36% per year). The firms in the highest moneyness option trading volume to stock trading volume ratio for call quintile outperform the lowest quintile by 0.575% per week (approximately 30% per year).
Originality/value
The authors first propose the measures, moneyness option trading volume to stock trading volume ratio, that combined with the trading volume and option moneyness. The authors provide evidence that the measures have the predictive ability to the future stock returns.
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Using the next-day and next-week returns of stocks in the Korean market, we examine the association of option volume ratios – i.e. the option-to-stock (O/S) ratio, which is the…
Abstract
Using the next-day and next-week returns of stocks in the Korean market, we examine the association of option volume ratios – i.e. the option-to-stock (O/S) ratio, which is the total volume of put options and call options scaled by total underlying equity volume, and the put-call (P/C) ratio, which is the put volume scaled by total put and call volume – with future returns. We find that O/S ratios are positively related to future returns, but P/C ratios have no significant association with returns. We calculate individual, institutional, and foreign investors’ option ratios to determine which ratios are significantly related to future returns and find that, for all investors, higher O/S ratios predict higher future returns. The predictability of P/C depends on the investors: institutional and individual investors’ P/C ratios are not related to returns, but foreign P/C predicts negative next-day returns. For net-buying O/S ratios, institutional net-buying put-to-stock ratios consistently predict negative future returns. Institutions’ buying and selling put ratios also predict returns. In short, institutional put-to-share ratios predict future returns when we use various option ratios, but individual option ratios do not.
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Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies try to…
Abstract
Informed traders may prefer the options market to the stock market for reasons including the leverage effect, transaction costs, restrictions on short sale. Many studies try to predict future returns of stocks using informed traders' behavior in the options market. In this study, we examine whether the trading volume ratios of single stock options have the predictive power for future returns of the underlying stock. By analyzing the stock price responses to the “preliminary announcement of performance” of 36 underlying stocks on the Korea Exchange from November 2014 to March 2021 and the trading volume of options written on those stocks, we investigate the relation between the option ratios, which are the call option volume to put option volume ratio (C/P ratio) and the option volume to stock volume ratio (O/S ratio), and the future returns of the underlying stock. We also examine which ratio is better in predicting the future returns. The authors found that both option ratios showed the statistically significant predictability about future returns of the underlying stock and that the return predictability of the O/S ratio is more robust than that of the C/P ratio. This study shows that indicators generated in the options market can be used to predict future underlying stock returns. Further, the findings of this study contributed to a dearth of literature pertaining to single stock options. The results suggest that the single stock options market is efficient and influences the price discovery in the stock market.
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Xiang Gao, Jiahao Gu and Yingchao Zhang
This paper aims to investigate whether single-name options trading prior to earnings announcements is more informative when there exist real activity manipulations.
Abstract
Purpose
This paper aims to investigate whether single-name options trading prior to earnings announcements is more informative when there exist real activity manipulations.
Design/methodology/approach
Using 5,419 earnings announcements during 2004–2018 made by 208 public US companies with relatively high options volumes ranked by the CBOE, the authors uncover two regularities using predictive regressions for stock return.
Findings
First, the total options volume up to twenty days pre-announcement is significantly higher than that in other periods only for earnings management firms; moreover, after detailing options characteristics, the authors find these intensive pre-announcement trading to be concentrated in transactions of in-the-money call and long-term maturity put options. Second, an increase in the single-name call minus put options volume can positively predict the underlying stock’s next-day excess return much better in real earnings management firms, with a larger magnitude of effect in periods right before regular earnings announcement dates.
Originality/value
This paper makes a marginal and novel contribution by showing that real earnings management can serve as a proxy for the potential profit from informed trading in options as the return predictability of options volume becomes stronger for firms that have the manipulation motive and indeed perform manipulative actions.
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Hamed Khadivar, Frederick Davis and Thomas Walker
In this paper, the authors examine options trading in firms that soon become rumored takeover targets. This study also examines whether measures of informed trading can predict…
Abstract
Purpose
In this paper, the authors examine options trading in firms that soon become rumored takeover targets. This study also examines whether measures of informed trading can predict target returns (upon rumor announcement and over the post-rumor period) and/or predict which rumors lead to bids. The authors further assess whether the informed trading they observe is more prevalent in the options market or the equity market.
Design/methodology/approach
This study calculates abnormal options volume using a market-model approach that accounts for different attributes of options trading. The authors construct a control sample and compare equity options trading of firms in their sample with that of the control sample. In addition, the authors fit a series of regressions to examine whether pre-rumor abnormal options trading can predict rumor accuracy in a multivariate setting.
Findings
The authors find that the volume of options traded is abnormally high over the pre-rumor period while the direction of option trades (abnormal call volume minus abnormal put volume) prior to takeover rumors predicts forthcoming takeover announcements, rumor date target firm returns and post-rumor target firm returns. The results are robust when controlling for publicly available information, when using a control sample, and when using alternative measures of informed trading.
Originality/value
This study is the first to provide evidence of informed options trading prior to a broad sample of takeover rumors. In addition, this study contributes to the literature on takeover predictability and profitability by showing that various pre-rumor measures of informed options trading significantly predict bid announcements. The authors also contributes to the literature on price discovery by providing evidence that informed investors are more likely to trade in the options market than in the equity market during the pre-event period.
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Han Ching Huang and Pei-Shan Tung
The purpose of this paper is to examine whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements, the proportion of…
Abstract
Purpose
The purpose of this paper is to examine whether the underlying option impacts an insider’s propensity to purchase and sell before corporate announcements, the proportion of insiders’ trading after announcements relative to before announcements, and the insider’s profitability around corporate announcements.
Design/methodology/approach
The authors test whether the timing information and option have impacted on the tendency of insider trade, the percentage of all shares traded by insiders in the post-announcement to pre-announcement periods and the average cumulative abnormal stock returns during the pre-announcement period.
Findings
Insiders’ propensity to trade before announcements is higher for stocks without options listed than for stocks with traded options. This result is stronger for unscheduled announcements than for scheduled ones. The proportion of insiders’ trade volume after announcements relative to before announcements in stocks that have not options listed is higher than those in stocks with traded options. The positive relationship between the insiders’ signed volume and the informational content of corporate announcements is stronger in stocks without traded options than in stocks with options listed. Insider trades prior to unscheduled announcement are more profitable than those before scheduled ones.
Research limitations/implications
The paper examines whether there is a difference between the effects of optioned stock and non-optioned stock. Roll et al. (2010) use the relative trading volume of options to stock ratio (O/S) to proxy for informed options trading activity. Future research could explore the impact of O/S. Moreover, the authors examine how insiders with private information use such information to trade in their own firms. Mehta et al. (2017) argue that insiders also use private information to facilitate trading (shadow trading) in linked firms, such as supply chain partners or competitors. Therefore, future research could consider the impact of shadow trading.
Social implications
Since the insider’s propensity to buy before announcements in stocks without options listed is larger than in stocks with traded options and the relationship is stronger for unscheduled announcements than for scheduled ones, the efforts of regulators should focus on monitoring insider trading in stocks without options listed prior to unscheduled announcements.
Originality/value
First, Lei and Wang (2014) find that the increasing pattern of insider’s propensity to trade before unscheduled announcements is larger than that before scheduled announcements. The authors document the underlying option has impacted the insider’s propensity to purchase and sell, and the relationship is stronger for unscheduled announcements than for scheduled ones. Second, related studies show insider’s trading activity has shifted from periods before corporate announcements to periods after corporate announcements to decrease litigation risk. This paper find the underlying option has influenced the proportion of insiders’ trading after announcements relative to before announcements when the illegal insider trade-related penalties increase.
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Vinh Xuan Bui and Hang Thu Nguyen
The purpose of this paper is to investigate the impacts of investor attention on stock market activity.
Abstract
Purpose
The purpose of this paper is to investigate the impacts of investor attention on stock market activity.
Design/methodology/approach
The authors employed the Google Search Volume (GSV) Index, a direct and non-traditional proxy for investor attention.
Findings
The results indicate a strong correlation between GSV and trading volume – a traditional measure of attention – proving the new measure’s reliability. In addition, market-wide attention increases both stock illiquidity and volatility, whereas company-level attention shows mixed results, driving illiquidity and volatility in both directions.
Originality/value
To the best of the authors’ knowledge, Nguyen and Pham’s (2018) study has been the only previous study identifying investor attention in Vietnam by using GSV as a proxy and examining the impacts of broad search terms about the macroeconomy on the stock market as a whole – on stock indices’ movements. The paper will contribute to this by quantifying GSV impacts on each stock individually.
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Raghavan Iyengar and Barry Shuster
Outstanding unexercised stock options can motivate managers to engage in actions that increase the value of their company’s stock, including buying back their firm’s stock. The…
Abstract
Purpose
Outstanding unexercised stock options can motivate managers to engage in actions that increase the value of their company’s stock, including buying back their firm’s stock. The objective of granting stock options to managers is to align their interests with stockholders by tying a portion of their compensation to the company’s stock performance. However, unexercised stock options may have unintended consequences by providing managers with a vested interest in artificially boosting stock prices via stock buybacks. The primary objective of this research is to study the main factors that influence firms' buyback decisions amongst hospitality firms at a time when these firms were clamoring for taxpayer bailouts. Results from logistic regression seem to suggest that outstanding executive stock options are a major contributory factor in a firm’s buyback decision. Estimates also indicate that larger, more profitable firms will likely engage in stock buybacks. These findings survive a battery of tests.
Design/methodology/approach
The authors use logistic regression to predict the probability of a firm’s buyback decision based on a given set of exogenous explanatory variables.
Findings
The paper supports the hypothesis that buyback decisions are guided by the motive to prop support stock prices in the presence of outstanding restricted stock options/warrants granted to firms' executives.
Research limitations/implications
The paper focuses on the buyback decision of U.S. hospitality firms. The results, therefore, might not be generalizable to firms in other industries or countries.
Practical implications
U.S. share repurchase corporate policy and government regulation needs to be revisited given the economic imperative for firms to invest in activities to restore employment and put them in a position for economic recovery.
Social implications
Public criticism of the size, structure and form (i.e. loan vs grant) of COVID-19 bailouts warrants an examination of whether the factors that drive hospitality and tourism firms to repurchase shares support economic recovery.
Originality/value
Consistent with agency theory, the authors find a significant positive association between outstanding restricted stocks and a firm’s decision to support the stock prices by buying back shares.
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This study investigates the impact of uncertainty on the mean-variance relationship. We find that the stock market's expected excess return is positively related to the market's…
Abstract
This study investigates the impact of uncertainty on the mean-variance relationship. We find that the stock market's expected excess return is positively related to the market's conditional variances and implied variance during low uncertainty periods but unrelated or negatively related to conditional variances and implied variance during high uncertainty periods. Our empirical evidence is consistent with investors' attitudes toward uncertainty and risk, firms' fundamentals and leverage effects varying with uncertainty. Additionally, we discover that the negative relationship between returns and contemporaneous innovations of conditional variance and the positive relationship between returns and contemporaneous innovations of implied variance are significant during low uncertainty periods. Furthermore, our results are robust to changing the base assets to mimic the uncertainty factor and removing the effect of investor sentiment.
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Fernando Gimeno-Arias and José Manuel Santos-Jaén
Within the fast-moving consumer goods (FMCG) supply chain, one of the problems facing the distribution channel strategy is the presence of the gray market. The article shows two…
Abstract
Purpose
Within the fast-moving consumer goods (FMCG) supply chain, one of the problems facing the distribution channel strategy is the presence of the gray market. The article shows two novel antecedents of the participation of official distributors in this gray channel: Negative impact on distributor performance and the relationship with their supplier. Knowledge of this background helps to preserve the strategy outlined for the official distribution channel.
Design/methodology/approach
Data were collected from 172 Spanish wholesale distributors and analyzed using PLS-SEM.
Findings
The authors found that the damage through negative affectation in the official distributor's performance and the cooperation provided by the manufacturer, have different effects. While affectation is shown to be a powerful antecedent of participation in the gray market, the effect of perceived manufacturer cooperation does not show strong results.
Practical implications
In business practice, these findings lead the manufacturer to keep transactions carried out in the gray market at low levels and provide cooperation to official distributors to guarantee the official channel strategy aimed at efficiency in the distribution of branded goods.
Originality/value
The background of the gray market discussed in the study has not been previously analyzed in the literature. In this way, the authors contribute to the knowledge of such a common problem as the presence of the gray market in the segmentation of distribution channels of high-demand products.
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