Relationship between Options Trading Volume and Company Value: Evidence from India

Abstract

Most of the empirical literature on the informational role of options markets and the stock price response is based on a simple dichotomy of companies with listed options versus companies without listed options with an implicit assumption that the benefits of options trading are homogenous across companies with listed options. However, when options trading volume is low, options listing may hardly have any impact on the underlying stock price and the company value in turn. This study was therefore taken up to investigate relationship between options trading volume and the valuation of underlying company. Using regression analysis between Tobin’s q, which captures company value and options trading volume, along with other control variables that could impinge upon company valuation, we find conclusive evidence that company valuation is significantly related to options trading volume. Therefore, investors and traders must remember that options listing must be supported by sufficient liquidity to offer any insights to future price trends.

Keywords

Options trading volume company value Tobin’s q

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