Put Option Buyers Predict Stock Market Returns?

Do informed put option buyers predict overall U.S. stock market returns? In her November 2025 paper entitled “Put Option Trading Efficiency”, Xiaolin Huo constructs a monthly Put Option Trading Efficiency (POTE) variable to measure the extent to which speculators hold larger put option positions on overpriced stocks than underpriced stocks. She measures POTE monthly as the slope of aggregate put open interest on each stock, weighted by contract size and divided by shares outstanding, versus a mispricing score for each stock based on 11 stock anomalies. A higher POTE suggests that investors are more actively using put options to express bearish views on overvalued stocks. Using monthly put option and short interest data on individual U.S. listed common stocks with price over $5 and market capitalizations above the NYSE 1st percentile, monthly value-weighted excess (relative to the U.S. Treasury bill yield) market returns and monthly values of a variety of market/economic indicators during January 1996 through December 2022, she finds that: (more…)