Option Volume Imbalance as a predictor for equity market returns
Study on option volume imbalance as a predictor for equity returns, focusing on market participants and features.
What it examines
This paper investigates the predictive power of Option Volume Imbalance (OVI) on future equity returns, using data from the PHLX and NOM exchanges. The study focuses on different market participant classes and employs a novel P&L regression method to analyze the data.
What it concludes
The research suggests that OVI can predict future equity returns, especially for Market Makers. Potential applications include trading strategies and market analysis. Future research could explore intraday analysis and the interplay between option and stock volumes.
Evidence objects
The research suggests that OVI can predict future equity returns, especially for Market Makers. Potential applications include trading strategies and market analysis. Future research could explore intraday analysis and the interplay between option and stock volumes.
key_findings bullet 1 · key_findings · validation V0
Raw abstract and provenance
Abstract: We investigate the use of the normalized imbalance between option volumes corresponding to positive and negative market views, as a predictor for directional price movements in the spot market. Via a nonlinear analysis, and using a decomposition of aggregated volumes into five distinct market participant classes, we find strong signs of predictability of excess market overnight returns. The strong… ▽ More We investigate the use of the normalized imbalance between option volumes corresponding to positive and negative market views, as a predictor for directional price movements in the spot market. Via a nonlinear analysis, and using a decomposition of aggregated volumes into five distinct market participant classes, we find strong signs of predictability of excess market overnight returns. The strongest signals come from Market-Maker volumes. Among other findings, we demonstrate that most of the predictability stems from high-implied-volatility option contracts, and that the informational content of put option volumes is greater than that of call options. △ Less
Source row: 1520 · abstract type: unknown