Option Skills

We contribute to the debate on whether institutional investors have an information advantage in a novel way – by investigating institutional options holdings. We find that net institutional option holdings predict both future abnormal stock returns and earnings surprises, particularly for stocks with more opaque public information environments. The return predictability in net option holdings stems from the negative information reflected in institutions’ put positions, and is orthogonal to other variables that may contain similar information (short interest and signed option trading imbalances). We find that institutions use put options as complements, rather than the often-posited substitute for short selling.