The Informational Role of Options Trading: Evidence from the Shanghai Stock Exchange 50ETF Options in China

Abstract

This study empirically investigates the effects of options trading on future stock returns. Leveraging the Shanghai Stock Exchange 50 exchange-traded fund (50ETF) options trading data in China, we show that put-call ratios, skewness ratios, and China's Volatility Index exhibit economically and statistically significant predictability for the expected returns of the 50ETF in the time series. We also show that a simple market timing strategy based on the above indicators can effectively improve annualized returns and reduce the corresponding risk. We conclude that options trading contains useful information about the future price movements of the underlying asset.

Keywords: Put-call ratios, skewness ratios, China VIX Index, variance risk premium, stock return predictability, market timing

JEL Classification: C32, C53, G12, G13