Do investors use options and futures to trade on different types of information? Evidence from an aggregate stock index

Option prices are sensitive to changes in volatility whereas futures prices are not. We investigate this distinction empirically and test the hypothesis that investors with information about future returns (volatilities) will prefer to trade in futures (options) because futures (options) protect the investor from the risk that their bet will go against them due to unforeseen changes in volatility (returns). Consistent with this hypothesis we find that order imbalances between institutional and retail investors in Korean KOSPI 200 index futures (options) robustly predict short-term returns (volatilities) on the KOSPI 200 index whereas options (futures) imbalances do not.