Information content of investor trading behavior: Evidence from Taiwan index options market

• This is the first study to investigate the information content of decoupled O/S ratios in the index-option market.
• Among four classes of traders, only foreign institutional investors have significant predictive power in the TXO market.
• The call O/S ratio outperforms the overall O/S and put-call ratios as an information-content variable.
• Our findings imply that leverage, rather than liquidity, is considered by the informed traders.

In this study, we analyze the information content of the TXO market using decoupled O/S ratio. First, we find that, among four classes of traders, only foreign institutional investors have significant predictive power in the TXO market, thereby providing evidence that foreign investor flows do indeed have an impact on host-country stock returns. Second, the decoupled O/S (specifically, call O/S) ratio appears to outperform the overall O/S and put-call ratios as an information-content variable. Third, we find that foreign institutional investors exhibit greater predictive ability with regard to the OTM and short-horizon TXO options, which implies that leverage, rather than liquidity, is considered by the informed traders. To the best of our knowledge, this study represents the first of its kind to investigate the information content of decoupled O/S ratios in the index-option market.