Investment Portfolio Strategies Based On Options Market Activity

Abstract

We propose a multiple regression model that incorporates options market activity to forecast future stock prices. To capture the information content from the options market, we use a predictor based on the activity of call and put options as measured by relative open interest across available strike prices.  We use a sample of stocks with actively traded options on the Chicago Board Options Exchange to test the model. Investment strategies that use these forecasts are shown to be superior to more simple strategies which ignore options market activity.