Aggregate Call Order Imbalance Strategy
Log in to collectAcademic paper
Betting Against the Crowd: Option Trading and Market Risk Premium
Jie Cao; Gang Li; Xintong Zhan; Guofu Zhou
Strategy in a nutshell
Universe: S&P 500 tracking asset (SPY) and risk-free asset (T-bills/BIL). Compute aggregate call order imbalance (ACIB) from equity options, weighted by underlying market cap. Use multi-period predictive regressions to forecast monthly market excess returns. Allocate wealth between market portfolio and T-bills using mean-variance utility (weight = 1/3 × expected excess return ÷ five-year variance). Rebalance monthly.
Economic rationale
Equity option trading reflects both informed and sentiment-driven trading. ACIB predicts future market returns beyond traditional predictors, significant in- and out-of-sample, providing time-series evidence of investor sentiment’s effect on market dynamics.