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arXiv · 2201.09319

Option Volume Imbalance as a predictor for equity market returns

Nikolas Michael·Mihai Cucuringu·Sam Howison
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Abstract

We investigate the use of the normalized imbalance between option volumes corresponding to positive and negative market views, as a predictor for directional price movements in the spot market. Via a nonlinear analysis, and using a decomposition of aggregated volumes into five distinct market participant classes, we find strong signs of predictability of excess market overnight returns. The strongest signals come from Market-Maker volumes. Among other findings, we demonstrate that most of the predictability stems from high-implied-volatility option contracts, and that the informational content of put option volumes is greater than that of call options.

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Nikolas Michael, Mihai Cucuringu, Sam Howison. 2022-01-23. Option Volume Imbalance as a predictor for equity market returns. https://arxiv.org/abs/2201.09319

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