Review of Quantitative Finance and Accounting

, Volume 41, Issue 3, pp 567–583 | Cite as

Comparing the information in short sales and put options

Original Research
First Online:

Abstract

Prior work shows that both short sales and put options contain information about future stock prices. In this study, we compare the return predictability in short sales to the return predictability in put options. The motivation for this comparison is based on the theoretical argument that informed traders can choose between short sales and put options when establishing short positions in a particular stocks. Results in this paper suggest that the underperformance of stocks with high short-selling activity is approximately four times larger than the underperformance of stocks with high put-option activity. While stocks that are most likely to face binding short-sale constraints drive the underperformance caused by put-option activity, we still find that short sales are generally more informative about future prices.

Keywords

Short selling Put options Informed trading Bearish trading activity Options 

JEL Classification

G12 G13 G14 G19 
This is a preview of subscription content, log in to check access.

References

  1. Admati A, Pfleiderer P (1988) A theory of intraday patterns: volume and price variability. Rev Financ Stud 1:3–40CrossRefGoogle Scholar
  2. Aitken M, Frino A, McCorry M, Swan P (1998) Short sales are almost instantaneously bad news: evidence from the Australian stock exchange. J Financ 53:2205–2223CrossRefGoogle Scholar
  3. Anthony J (1988) The interrelation of stock and options market trading-volume data. J Financ 43(4):949–964CrossRefGoogle Scholar
  4. Asquith P, Pathak P, Ritter J (2005) Short interest, institutional ownership, and stock returns. J Financ Econ 78(2):243–276CrossRefGoogle Scholar
  5. Back K (1993) Asymmetric information and options. Rev Financ Stud 6(3):435–472CrossRefGoogle Scholar
  6. Barclay M, Warner J (1993) Stealth trading and volatility: which trades move prices? J Financ Econ 34:281–306CrossRefGoogle Scholar
  7. Battalio RH, Schultz P (2010) Regulatory uncertainty and market liquidity: the 2008 short sale ban’s impact on equity options. Forthcoming, J FinancGoogle Scholar
  8. Bhattacharya M (1987) Price changes of related securities: the case of call options and stocks. J Financ Quant Anal 22(1):1–15CrossRefGoogle Scholar
  9. Black F (1975) Fact and fantasy in the use of options. Financ Anal J 31(4):36–72CrossRefGoogle Scholar
  10. Black F, Myron S (1972) The valuation of option contracts and a test of market efficiency. J Financ 27(2):399–417CrossRefGoogle Scholar
  11. Blau B, Van Ness B, Van Ness R (2009) Short selling and weekend effect for NYSE stocks. Financ Manage 38:603–630CrossRefGoogle Scholar
  12. Boehmer E, Jones C, Zhang X (2008) Which shorts are informed? J Financ 63:491–527CrossRefGoogle Scholar
  13. Cao C, Chen Z, Griffin J (2005) Informational content of option volume prior to takeovers. J Bus 78(3):1073–1109CrossRefGoogle Scholar
  14. Chakravarty S, Gulen H, Mayhew S (2004) Informed trading in stock and option markets. J Financ 59(3):1235–1258CrossRefGoogle Scholar
  15. Chan K, Chung Y, Johnson H (1993) Why option prices lag stock prices: a trading-based explanation. J Financ 48(5):1957–1967CrossRefGoogle Scholar
  16. Chan K, Chung Y, Fong W (2002) The informational role of stock and option volume. Rev Financ Stud 15(4):1049–1075CrossRefGoogle Scholar
  17. Christophe S, Ferri M, Angel J (2004) Short selling prior to earnings announcements. J Financ 59:1845–1875CrossRefGoogle Scholar
  18. Christophe S, Ferri M, Hsieh J (2010) Informed trading before analyst downgrades: evidence from short sellers. J Financ Econ 95:85–106CrossRefGoogle Scholar
  19. D’Avolio G (2002) The market for borrowing stock. J Financ Econ 66:271–306CrossRefGoogle Scholar
  20. Danielsen B, Sorescu S (2001) Why do option introductions depress stock prices? A study of diminishing short sale constraints. J Financ Quant Anal 36(4):451–484CrossRefGoogle Scholar
  21. Dechow P, Hutton A, Meulbroek L, Sloan R (2001) Short-sellers, fundamental analysis, and stock returns. J Financ Econ 61(1):77–106CrossRefGoogle Scholar
  22. Desai H, Ramesh K, Thiagarajan S, Balachandran B (2002) An investigation of the informational role of short interest in the Nasdaq market. J Financ 57(5):2263–2287CrossRefGoogle Scholar
  23. Diamond D, Verrecchia R (1987) Constraints on short-selling and asset price adjustment to private information. J Financ Econ 18(2):277–311CrossRefGoogle Scholar
  24. Diether K, Lee K, Werner I (2009) Short-sale strategies and return predictability. Rev Financ Stud 22:575–607CrossRefGoogle Scholar
  25. Easley D, O’Hara M, Srinivas P (1998) Option volume and stock prices: evidence on where informed traders trade. J Financ 53(2):431–465CrossRefGoogle Scholar
  26. Easley D, Hvidkjaer S, O’Hara M (2002) Is information risk a determinant of asset returns? J Financ 57(5):2185–2221CrossRefGoogle Scholar
  27. Edwards A, Hanley K (2010) Short selling in initial public offerings. J Financ Econ 98:21–39CrossRefGoogle Scholar
  28. Engelberg J, Reed A, Ringgenberg M (2010) How are shorts informed? Short sellers, news, and information processing, Working PaperGoogle Scholar
  29. Evans R, Geczy C, Musto D, Reed A (2009) Failure is an option: impediments to short selling and options prices. Rev Financ Stud 22:1955–1980CrossRefGoogle Scholar
  30. Figlewski S, Webb G (1993) Options, short sales, and market completeness. J Financ 48(2):761–777CrossRefGoogle Scholar
  31. Finucane T (1999) A new measure of the direction and timing of information flow between markets. J Financ Mark 2(2):135–151CrossRefGoogle Scholar
  32. Gu A, Yang C (2007) Short sales constraints and return volatility: evidence from the chinese A and H share markets. Rev Pac Basin Financ Mark Policies 10(4):469–478CrossRefGoogle Scholar
  33. Jennings R, Starks L (1986) Earnings announcements, stock price adjustment, and the existence of options markets. J Financ 41:107–125CrossRefGoogle Scholar
  34. Kluger B, Wyatt S (1995) Options and efficiency: some experimental evidence. Rev Quant Financ Acc 5:179–201CrossRefGoogle Scholar
  35. Koski J, Scruggs J (1998) Who trades around the ex-dividend day? Evidence from NYSE audit file data. Financ Manage 27(3):58–72CrossRefGoogle Scholar
  36. Lakonishok J, Vermaelen T (1986) Tax-induced trading around ex-dividend days. J Financ Econ 3:287–319CrossRefGoogle Scholar
  37. Manaster S, Rendleman R (1982) Option prices as predictors of equilibrium stock prices. J Financ 37(4):1043–1057CrossRefGoogle Scholar
  38. Mayhew S, Stivers C (2003) Stock return dynamics, option volume, and the information content of implied volatility. J Futures Mark 23(7):615–646CrossRefGoogle Scholar
  39. Nagel S (2005) Short sales, institutional investors and the cross-section of stock returns. J Financ Econ 78(2):277–309CrossRefGoogle Scholar
  40. Pan J, Poteshman AM (2006) The information in option volume for future stock prices. Rev Financ Stud 19(3):871–908CrossRefGoogle Scholar
  41. Senchack AJ, Starks L (1993) Short-sale restrictions and market reaction to short-interest announcements. J Financ Quant Anal 28(2):177–194CrossRefGoogle Scholar
  42. Stephan J, Whaley R (1990) Intraday price change and trading volume relations in the stock and stock option markets. J Financ 45(1):191–220CrossRefGoogle Scholar
  43. Wei H, Lee Y, Wei P (2010) Do option traders on value and growth stocks react differently to new information? Rev Quant Financ Acc 34:371–381CrossRefGoogle Scholar
  44. Wu C, Li Q, Wei J (1996) Incomplete-information capital market equilibrium with heterogenous expectations and short sale restrictions. Rev Quant Financ Acc 7:119–136CrossRefGoogle Scholar
  45. Xu J (2007) Price convexity and skewness. J Financ 62:2521–2552CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Department of Economics and FinanceUtah State UniversityLoganUSA
  2. 2.Department of Finance and EconomicsMississippi State UniversityStarkvilleUSA

Personalised recommendations