The directional information content of options volumes

This study examines the directional information content realized by trades in a highly liquid options market by constructing put–call volume ratios and decoupled options-to-spot volume ratios. By investigating whether the specific investor type predicts underlying returns and the method used to exploit a directional information advantage, we find that foreign investment firms can leverage their directional information by executing buy trades to open new positions. Their open-buy trades significantly predict next-day spot returns, whereas trades initiated by domestic firms do not. This relationship becomes stronger for out-of-the-money, large, and short-horizon options trades and during the short-sale restriction period.