The Information Content of Unusual Option Activity

We examine the predictive content of unusual option activity (UOA) for underlying stock returns. Using OptionMetrics and CRSP data from 2013 to 2023, we identify UOA through strict contract-level filters, requiring extreme deviations in trading volume and open interest relative to recent benchmarks. Our analysis shows that, while large option trades in general are not predictive, properly defined UOA, especially in out-of-the-money, near-maturity calls, is associated with economically and statistically significant positive abnormal returns. Put-based signals show weaker and sometimes negative predictive power. Importantly, UOA’s profitability has declined since 2020 as the strategy has become more widely followed, with stronger same-day reactions and reduced post-event drift. For asset managers, these findings highlight both the potential value of UOA as a trading signal and the practical challenges of execution and crowding in increasingly competitive option markets.