Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage?


  • The authors gratefully acknowledge the Key Developments data provided by Capital IQ, borrowed shares and rebate rates data provided by Dataexplorers, as well as the preliminary and Point-In-Time Compustat data provided by Charter Oak Investment Systems Inc. We thank Divya Anantharaman, Mary Billings, Mei Cheng, Edwige Cheynel, Richard Frankel, Christopher Jones, Andy Van Buskirk (discussant), and an anonymous referee for helpful comments and discussions. We also appreciate suggestions from workshop participants at the 2011 Journal of Accounting Research Conference, Finance and Accounting Conference at Hebrew University of Jerusalem, City University of Hong Kong, Columbia University, George Washington University, Hong Kong University of Science and Technology, University of Hong Kong, and University of Oulu.


Recent evidence shows that option volatility skews and volatility spreads between call and put options predict equity returns. This study investigates whether such predictive ability is driven by option traders’ information advantage. We examine the predictive ability of volatility skews and volatility spreads around significant information events including earnings announcements, other firm-specific information events, and events that trigger significant market reactions. Consistent with option traders having an information advantage relative to equity traders before information events, we find that the option measures immediately before these events have higher predictive ability for short-term event returns than they do in a more dated window or before a randomly selected pseudo-event. We also find that option measures have predictive ability after information events. However, this predictive ability holds only for unscheduled corporate announcements, which suggests that, relative to equity traders, option traders have superior ability to process less anticipated information.