Leveraging a call-put ratio as a trading signal

Abstract

We examine whether a put-call ratio, derived from a unique set of market data, can be used to predict directional moves in asset prices during various market conditions between March 2005 and December 2012. Our findings show: (1) specific market participant's options trading volume is a predecessor to asset price movements, and (2) portfolios based on the put-call ratio adjusted for four factors Carhart model and transaction costs exhibit abnormal excess returns.

Keywords:

• Anomalies in prices
• Portfolio management
• Technical trading
• Financial forecasting
• Investment management
• Options
• Behavioral finance

Acknowledgements

The authors thank Axel Vischer from Eurex, Jeffrey Soule and International Securities Exchange Holdings for providing the data and for discussing initial versions of this research. The authors also thank David Starer, Hamed Ghoddusi, and participants of the 5th. High-Frequency data conference at Stevens Institute of Technology for suggestions and informal discussions about this paper; Patrick Jardine for proof-reading the article, and to the Stevens Alliance for Innovation and Leadership for partially funding this work. The opinions presented are the exclusive responsibility of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

Patrick Houlihan http://orcid.org/0000-0002-9935-2764

Germán G. Creamer http://orcid.org/0000-0002-3159-5153

Notes

† Company specific indicators act contrarian in nature when they peak in value (Lamont and Stein 2004, Tsuji 2009, Simon and Wiggins 2001).

Additional information

Funding

This work was supported by Stevens Alliance for Innovation and Leadership: Grant “News, corporate network and the Put Call ratio”.