Do option open-interest changes foreshadow future equity returns?
Recent work considers whether information is simultaneously reflected in both option and equity markets. We provide new evidence supporting Black’s (Financ. Anal. J. 31:36–72, 1975) conjecture that information is first revealed in option markets. Specifically, changes in call and put open-interest levels have predictive power for future equity returns. Large increases in call open interest are followed by significantly increased equity returns. Put open-interest increases precede weaker future returns, but the relationship is considerably less pronounced in the presence of certain controls. The recent change in the call-to-put open-interest ratio has predictive power as to equity returns over the following week, even after controlling for numerous factors.