Betting Against the Crowd: Option Trading and Market Risk Premium

„We study how equity option trading affects the market risk premium. We find that a measure of aggregate call order imbalance (ACIB), defined as the cross-sectional average of the difference between open-buy and open-sell volume, negatively forecasts future stock market returns significantly from days to months. Moreover, ACIB represents an option-based investor sentiment measure that accounts for excess option buying or selling, and is highly correlated with the stock investor sentiment. Our findings shed new insights on the distinctions for call and put option trading, index and equity option trading, and cross-sectional and time-series predictions.”

Cao, Jie and Li, Gang and Zhan, Xintong and Zhou, Guofu, Betting Against the Crowd: Option Trading and Market Risk Premium (September 1, 2022).

Available at SSRN: https://ssrn.com/abstract=4301015 or http://dx.doi.org/10.2139/ssrn.4301015//