Determinants of large stock price movements: a perspective from the options market

Abstract

I empirically investigate the information role of trading volume of call and put options on large stock price movements. I define two variables -crash and jump- to indicate large stock price movements with respect to average return of previous 60- months for each company. Moreover, I use price-based measures and O/S ratio to indicate informed traders in the options market. The sample consists of comprehensive monthly U.S. options and stock market dataset, for 2778 individual firms, which spans the period between 1996 to 2015. I find that volume of put and call options has information about large negative movement in contrast to previous literature both before a jump and a crash. Specifically, before a crash, investors prefer to buy out-of-money put options. Moreover, put volume has a higher predictive power than call volume on crash variable. Before a jump, investors become reluctant to trade in options market. These results document that investors behave asymmetrically before good and bad news.