THE RELATIONSHIP BETWEEN OP/OS RATIO AND ABNORMAL RETURN

Trading volume in options may either be a positive or negative signal for future performance. First, if investors trade options because of increased risk, one may think that high option trading should be associated with a higher return. Second, if option trading reflects the degree of informed trading associated with the firm, then again investors should require a higher return on average for shares that have high option trading. Third, option trading can potentially quantify the degree of short sale constraints. According to this third hypothesis, options are used to bypass short-selling constraints. This suggests that informed traders expect a reduction in prices, which should be reflected in lower returns. I find that shares that have the lowest option trading volume outperform the highest one by 0.22% per day.