The Information in Hedge Fund Option Holdings
Management Science, forthcoming
47 Pages Posted: 29 Nov 2017 Last revised: 2 May 2023
Date Written: September 28, 2022
Abstract
We provide new insights on how hedge funds use options and short selling channels to trade on their negative information. Bearish information in hedge fund option positions is economically large, distinct from information in short interest, and it is the combination of option positions and short interest that provide the strongest information signal. A portfolio of stocks with high short interest and bearish hedge fund options positions predicts negative abnormal returns that are more than four times as large as the portfolio with high short interest and bullish options positions. The information in hedge fund option positions increases during periods of market stress, while that in short interest does not. This increase is concentrated in capital-constrained hedge funds, suggesting that options provide a channel for capital-constrained hedge funds to exploit their information advantage.
Keywords: Institutional Trading, Informed Traders, Options Markets
JEL Classification: G14, G20
Suggested Citation: Suggested Citation