Using Options Open Interest and Volume as Directional Signals

# Can option open interest and option volume be used to predict stock direction?


# Can option open interest and option volume be used to predict stock direction?












I am trying to determine whether option open interest and option volume contain usable information for predicting stock direction.

More specifically, I am not asking whether these variables are “interesting,” but whether they have shown any empirical predictive value once transformed into quantitative features.

Examples of features I am considering include:

Call vs put open interest imbalance Call vs put option volume imbalance Change in open interest by strike or expiry Volume-to-open-interest ratio Near-the-money vs out-of-the-money activity Concentration of activity in short-dated contracts

My questions are:

Are there any well-known formulas, transformations, or feature constructions from option open interest / option volume that have shown predictive power for next-day direction?

Are raw call/put ratios generally too naive, and if so, what more informative alternatives are typically used? In practice, how do you distinguish directional information from non-directional activity such as hedging, spreads, rolls, or volatility trades?

Is there any evidence that these variables become materially more useful only when combined with other option features such as implied volatility, skew, or Greeks?

Thank you.

## Answer by Divyanshu Verma (score 1)

https://quant.stackexchange.com/a/85582

Yes, but with caveats.

The raw put/call ratio is too naive. The cleaner version is the unexpected component after regressing out realized volatility, market level, and time to expiry. That residual better reflects genuine directional positioning rather than mechanical hedging.

Volume to open interest ratio is genuinely useful. A surge in call volume alongside rising open interest suggests new positioning rather than rolls or closes, which is more informative about directional intent.

Distinguishing directional from non-directional flow is hard. A practical filter is focusing on single leg trades at or near the ask for calls, since spread legs and delta hedges dominate raw volume.

These features become meaningfully more predictive when combined with skew and term structure. Call volume imbalance plus flattening skew is a much stronger signal than either alone. In isolation, none of these will give you a clean edge.