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Price Discovery in Futures and Options Markets

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  • Naomi Boyd
  • Peter Locke

Abstract

We evaluate price discovery in the natural gas futures and futures options markets using a transaction‐based approach. By sampling market maker prices, we allow for a distinction between market maker buy and sell futures prices, both directly from trades in the futures market, and futures prices implied by trades in the options market. Information shares are compared between futures and options markets as well as within the options market. Given the common architecture of the two markets, as expected we find little price information generated in the options market. Within the options market, the highly levered out‐of‐the‐money options offer less price discovery than other options. We attribute this to the higher transaction costs of out‐of‐the‐money options. © 2013 Wiley Periodicals, Inc. Jrl Fut Mark 34:853–867, 2014

Suggested Citation

  • Naomi Boyd & Peter Locke, 2014. "Price Discovery in Futures and Options Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(9), pages 853-867, September.
    • Handle: RePEc:wly:jfutmk:v:34:y:2014:i:9:p:853-867
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    Cited by:

    1. Hauser, Shmuel & Kedar-Levy, Haim & Milo, Orit, 2022. "Price discovery during parallel stocks and options preopening: Information distortion and hints of manipulation," Journal of Financial Markets, Elsevier, vol. 59(PA).
    2. Marc J. M. Bohmann & David Michayluk & Vinay Patel, 2019. "Price discovery in commodity derivatives: Speculation or hedging?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(9), pages 1107-1121, September.
    3. Zou, Mi & Han, Lin & Yang, Zhini, 2024. "Price discovery of the Chinese crude oil options and futures markets," Finance Research Letters, Elsevier, vol. 60(C).
    4. Martin Hauptfleisch, 2019. "Financial Decision-Making Using Data," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 6-2019.
    5. Marc Bohmann, 2020. "Price Discovery and Information Asymmetry in Equity and Commodity Futures Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2020.
    6. Hao, Jing & He, Feng & Liu-Chen, Baiao & Li, Zihe, 2021. "Price discovery and its determinants for the Chinese soybean options and futures markets," Finance Research Letters, Elsevier, vol. 40(C).

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