Abstract
This article investigates whether options' open interest can be incorporated successfully into technical trading strategies. A set of 2040 trading rules is applied to the German index DAX 30 and to the 10 German stocks with the highest market capitalization. The results show that open interest rules, when combined with information from the spot market, can improve the predictive power of technical trading rules. Both put and call open interest appear to contain information regarding future equity prices while the open interest differential performs very poorly. Best results are achieved for the DAX index, showing economically significant profits even when transaction costs are taken into account whereas the results are more mixed for individual options. Across all assets, out-of-the-money (OTM) calls and in-the-money (ITM) puts exhibit the strongest forecasting power for the utilized rules.
Notes
1 For further literature on open interest, see Aguenaou et al. (Citation2011).
2 E.ON is excluded from the sample as the corresponding stock options are not available for the whole period due to the merger of VEBA and VIAG in 2000.
3 Detailed results for the returns and SDs across all rules, assets and moneyness ranges are available upon request.