Review of Derivatives Research

, Volume 18, Issue 1, pp 51–73

Are put-call ratios a substitute for short sales?

Article

DOI: 10.1007/s11147-014-9102-3

Cite this article as:
Blau, B.M. & Brough, T.J. Rev Deriv Res (2015) 18: 51. doi:10.1007/s11147-014-9102-3

Abstract

Prior research argues that pessimistic traders can use options as substitutes for short sales particularly when stocks are expensive to short. Motivated by this contention, we examine the relation between put-call ratios, short-selling activity, and constraints to short selling. Results show that (1) put-call ratios are inversely related, instead of directly related, to proxies for short-sale constraints and (2) the significant negative relation between current put-call ratios and future returns (Pan and Poteshman in Rev Financ Stud 19:871–908, 2006) is orthogonal to proxies for short-sale constraints. These results indicate that short-sale constraints do not influence bearish option activity. While prior studies show that short sellers are generally contrarian in contemporaneous and past returns, we find that put-call ratios follow periods of negative returns. However, any observed return predictability contained in put-call ratios is driven by ratios that follow periods of positive returns.

Keywords

Options Short sales Short sale constraints Informed trading 

JEL Classification

G10 G14 

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Huntsman School of BusinessUtah State UniversityLoganUSA

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