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Delta and vega exposure trading in stock and option markets

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  • Maraachlian, Hilda
  • Rourke, Thomas

Abstract

This paper introduces an empirical method to evaluate the composition of trading activity in stock and option markets that is based on signed trade count imbalances in these markets. This method can be used to estimate the extent to which traders use option markets to obtain exposure to stock return volatility (i.e., vega exposure) versus exposure to the sign of stock returns (i.e., delta exposure), as well as examine traders' preferences on trading venue by desired exposure type. We present evidence suggesting that trading for vega exposure is a much larger component of option activity than is trading for delta exposure. The results also imply that delta-motivated traders have a preference for trading stocks over options, while both delta- and vega-motivated traders appear more prone to trade calls over puts.

Suggested Citation

  • Maraachlian, Hilda & Rourke, Thomas, 2014. "Delta and vega exposure trading in stock and option markets," Journal of Financial Markets, Elsevier, vol. 18(C), pages 96-125.
    • Handle: RePEc:eee:finmar:v:18:y:2014:i:c:p:96-125
    DOI: 10.1016/j.finmar.2012.12.002
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    References listed on IDEAS

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    Cited by:

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    2. Lee, Jaeram & Ryu, Doojin & Yang, Heejin, 2021. "Does vega-neutral options trading contain information?," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 294-314.

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    More about this item

    Keywords

    Option markets; Volatility trading;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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