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Article

LEAPS of Faith: A Trading Indicator Based on CBOE S&P 500 LEAPS Option Open Interest Information

Rafiqul Bhuyan, Patricia A. Cheshier and Denver H. Travis
The Journal of Investing Summer 2010, 19 (2) 85-94; DOI: https://doi.org/10.3905/joi.2010.19.2.085
Rafiqul Bhuyan
is an associate professor of finance in the College of Business Administration and Public Administration, California State University in San Bernardino, CA.
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  • For correspondence: rbhuyan@csusb.edu
Patricia A. Cheshier
is a professor of risk management and insurance in the College of Business Administration, California State University in Sacramento, CA.
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  • For correspondence: cheshier@csus.edu
Denver H. Travis
is an assistant professor of finance in the College of Business Administration, California State University in Sacramento, CA.
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  • For correspondence: travisd@csus.edu
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Abstract

A long-standing debate has revolved around the question of whether information travels first to the stock market or to the stock options market. Using an open interest-based predictor calculated from CBOE S&P 500 LEAPS options, we find evidence of strong predictive power from the options market on the underlying S&P 500 index. This evidence is supported by out-of-sample tests of a simple trading strategy using the open interest-based predictor as a trading indicator. The authors illustrate the practical application of this strategy for an active manager using exchange-traded funds with a variety of leverage and shorting constraints. The trading indicator is also shown to be useful for a semi-active manager employing enhanced indexing techniques.

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The Journal of Investing: 19 (2)
The Journal of Investing
Vol. 19, Issue 2
Summer 2010
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LEAPS of Faith: A Trading Indicator Based on CBOE S&P 500 LEAPS Option Open Interest Information
Rafiqul Bhuyan, Patricia A. Cheshier, Denver H. Travis
The Journal of Investing May 2010, 19 (2) 85-94; DOI: 10.3905/joi.2010.19.2.085

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LEAPS of Faith: A Trading Indicator Based on CBOE S&P 500 LEAPS Option Open Interest Information
Rafiqul Bhuyan, Patricia A. Cheshier, Denver H. Travis
The Journal of Investing May 2010, 19 (2) 85-94; DOI: 10.3905/joi.2010.19.2.085
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  • Article
    • Abstract
    • DATA DESCRIPTION
    • ESTABLISHING THE STATISTICAL RELATIONSHIP
    • DEVELOPMENT OF A TRADING STRATEGY
    • OUT-OF-SAMPLE TESTING OF THE TRADING STRATEGY
    • ROBUSTNESS TESTS
    • APPLICATIONS FOR ENHANCED INDEXING
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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