This study investigates the informational role of options open interests and volume in predicting the future stock prices in Indian market. Most of the time, the uninformed traders lose to informed traders because they neither have private information nor the sophisticated knowledge to process the publicly available information. The most closely watched data are also the least informative. This study is an attempt to find out if the daily published and publicly available options data are informative and can be used to forecast the future stock price at maturity. Then the retail traders and investors will be able to minimize their loss to informed traders and enhance their portfolio performance. The sample of this study is 17 highly traded Nifty 50 index stocks from different sectors having significant share in the index. Predictors based on options price and options volume have been estimated, following Bhuyan and Williams (2004), and then used in the regression model as predictor variables of price at maturity both jointly and in isolation. The period of study covers stock options contract of three months (July-September 2009). Only near month contract is considered for the study because of liquidity concern. The coefficients of predictors are found to be significant and not statistically different across the study period. Consistent with the results of the previous studies, the results show that options open interest and volume are relevant in forecasting future prices.

The two broad categories of traders in financial literature are the informed traders and the uninformed traders. Informed traders are those who possess private information and take large positions based on the private information they have. As information is not freely available so they also need to incur cost for acquiring the information. Uninformed traders are those who do not have access to private information. They are retail traders, who take smaller positions and they are not capable of incurring the cost for acquiring information. Most of the time, the uninformed traders lose to informed traders and so the informed traders obtain a better payoff from their transactions. Apart from access to private information, another possible reason for uninformed traders to lose to informed ones could be that they are not equipped with sophisticated knowledge of processing even the publically available information and to gain from it. Gould (2003) rightly identifies that market provides a lot of data to forecast future prices, but the challenge is to convert the data into useful information. He says that price is the data the traders usually watch more closely, but he finds it to be least informative. The open interest and volume data of options market are daily published and publically available information, but retail traders and investors fail to gain from it which otherwise could be a source of information. So even after being in public domain, the information contained in them remains unexplored. This study is an attempt to find out if this daily published and publicly available data are informative and could be used to forecast the future stock price at maturity, so that the retail traders and investors will be able to minimize their losses to informed traders and enhance their portfolio performance.

Options market instruments are broadly viewed as hedging instruments, but earlier studies have shown that options market is a venue for information-based trading and so this market can be informative about future stock price movements. This study attempts to find out if this theory is applicable to Indian markets? We follow the assumption of Bhuyan and Williams (2004) that the open interest position on each strike price expresses the overall beliefs of all participating investors about the future price of the underlying security. The volume in the options market has been assumed as the strength of information with the view that higher volume in options market reflects larger number of informed traders transacting in the market. This paper finds out how strongly the open interest-based and volume-based predictors are able to forecast the prices at maturity and further tests for equality of coefficients across and within the study months. The results are robust, significant and consistent with the existing theory of informative options market suggesting that the method can be used by retail and uninformed traders to minimize their losses or enhance their portfolio returns.

Financial Economics Journal, Indian Market, Financial Literature, Hedging Instruments, Indian Markets, Options Market Instruments, Chicago Board Options Exchange, Black and Scholes Model, Information Asymmetry, Granger Causality Test, Indian Stock Market.