Option Volume and Open Interest for Predicting Underlying Return—A Study of Index Option in Indian Stock Market

Many of the informed traders are preferring options market for their investment purposes not only for its hedging properties, but also due to the impacts of leveraging effects. Numerous studies have tried to use the derivative market, most especially option contracts for predicting future returns of underlying using informed trader’s behavior exhibited in the market. This study aims to find the efficacy of Call Put Ratio of Option variables, a very commonly used information measure for predicting underlying return. For this, Option volume as well as Open Interest has been taken over the period from January 2022 to January 2023 in the study. It was observed that while literature claims that these two ratios have the predicting capability in terms of individual stock option, the same does not hold true in terms of index option as considered in the study. For the index option, the traders and portfolio manager should not only depend on these two variables while making an informed decision as the relationship established cannot be concluded to be entirely predictive.