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Asymmetric Volatility and Trading Activity in Index Futures Options

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  • Kam C. Chan
  • Louis T. W. Cheng
  • Peter P. Lung

Abstract

We examine the impact of option trading activity on implied volatility changes to returns in the index futures option market. Controlling for option moneyness, delta‐to‐option‐premium ratio, and liquidity, we find that net buying pressure, profit‐maximization behavior, and liquidity are interrelated and affect asymmetric responses of implied volatilities to returns. Implied volatilities of options with more liquidity, a higher exercise price, and a higher delta‐to‐option‐premium ratio have the most profound asymmetric response.

Suggested Citation

  • Kam C. Chan & Louis T. W. Cheng & Peter P. Lung, 2005. "Asymmetric Volatility and Trading Activity in Index Futures Options," The Financial Review, Eastern Finance Association, vol. 40(3), pages 381-407, August.
    • Handle: RePEc:bla:finrev:v:40:y:2005:i:3:p:381-407
    DOI: 10.1111/j.1540-6288.2005.00107.x
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    Cited by:

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    3. Kam C. Chan & Carl R. Chen & Peter P. Lung, 2010. "Business Cycles and Net Buying Pressure in the S&P 500 Futures Options," European Financial Management, European Financial Management Association, vol. 16(4), pages 624-657, September.

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