Our analysis uncovers a strong correlation between option open interest and short interest, revealing how option activities may drive short selling in the stock market.

In the options market, open interest refers to the number of outstanding contracts that have not been closed. When multiplied by the stock price and the contract multiplier, it gives the notional size of the options market for that stock.

A strong relationship is observed when we plot the option notional value against the percentage of the stock floated.

Stocks with higher option open interest tend to be shorted more frequently.

One explanation is that customers use options to hedge or short stocks, prompting option market makers to take long positions in options and then short the underlying stock to hedge their exposure. Thus, option customers cause market makers to short the stock.

Alternatively, it is possible that investors are shorting stocks through both the options market and the borrowing market, which could explain the observed correlation.

The stocks with the largest option positions relative to their size are often the same ones prominently featured in the borrow market with high percentage floated.. For example, stocks like TSLA, SMCI, and others known from the borrow market show significant relative option positions.

Investors should closely monitor the notional value of option open interest, as it can serve as an indicator of short interest. However, it’s important to note that open interest also includes long positions, so it does not always directly correlate with short interest.

Largest Options Open Interest Relative to Company Size

Black Aps Screener SPX, % of Float, Export

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