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Does information drive trading in option strategies?

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Author Info

  • Fahlenbrach, Rüdiger
  • Sandås, Patrik

Abstract

We study trading in option strategies in the FTSE-100 index market. Trades in option strategies represent around 37% of the total number of trades and over 75% of the total trading volume in our sample. We find some evidence that order flow in volatility-sensitive option strategies contains information about future realized volatility. We do not find evidence that order flow in directionally-sensitive option strategies contains information about future returns. Overall, our evidence suggests that option strategies are used both by traders who possess non-public information about future volatility and by uninformed speculators who appear to follow unprofitable trend chasing strategies.

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File URL: http://www.sciencedirect.com/science/article/B6VCY-4YHNYY0-3/2/3ab4507d470c88b2fc9bfee28d2c4bb6
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 10 (October)
Pages: 2370-2385

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2370-2385

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Option strategies Option spreads Option combinations Volatility trading;

References

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  1. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
  2. Hemler, Michael L. & Miller, Thomas W., 1997. "Box Spread Arbitrage Profits following the 1987 Market Crash: Real or Illusory?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 71-90, March.
  3. Bedendo, Mascia & Hodges, Stewart D., 2009. "The dynamics of the volatility skew: A Kalman filter approach," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1156-1165, June.
  4. Chang, Chuang-Chang & Hsieh, Pei-Fang & Wang, Yaw-Huei, 2010. "Information content of options trading volume for future volatility: Evidence from the Taiwan options market," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 174-183, January.
  5. Joshua D. Coval, 2001. "Expected Option Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 983-1009, 06.
  6. Santa-Clara, Pedro & Saretto, Alessio, 2009. "Option strategies: Good deals and margin calls," Journal of Financial Markets, Elsevier, vol. 12(3), pages 391-417, August.
  7. Chang, Chuang-Chang & Hsieh, Pei-Fang & Lai, Hung-Neng, 2009. "Do informed option investors predict stock returns? Evidence from the Taiwan stock exchange," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 757-764, April.
  8. Bauer, Rob & Cosemans, Mathijs & Eichholtz, Piet, 2009. "Option trading and individual investor performance," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 731-746, April.
  9. Sophie X. Ni & Jun Pan & Allen M. Poteshman, 2008. "Volatility Information Trading in the Option Market," Journal of Finance, American Finance Association, vol. 63(3), pages 1059-1091, 06.
  10. Ronn, Aimee Gerbarg & Ronn, Ehud I, 1989. "The Box Spread Arbitrage Conditions: Theory, Tests, and Investment Strategies," Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 91-108.
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Citations

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Cited by:
  1. D. Matsypura & V.G. Timkovsky, 2013. "Integer programs for margining option portfolios by option spreads with more than four legs," Computational Management Science, Springer, vol. 10(1), pages 51-76, February.
  2. Stivers, Chris & Sun, Licheng, 2013. "Returns and option activity over the option-expiration week for S&P 100 stocks," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4226-4240.
  3. Choy, Siu Kai & Wei, Jason, 2012. "Option trading: Information or differences of opinion?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2299-2322.
  4. Mugwagwa, Tafadzwa & Ramiah, Vikash & Naughton, Tony & Moosa, Imad, 2012. "The efficiency of the buy-write strategy: Evidence from Australia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(2), pages 305-328.

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