IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v17y2009i2p189-208.html
   My bibliography  Save this article

Informed trading under different market conditions and moneyness: Evidence from TXO options

Author

Listed:
  • Chan, Kam C.
  • Chang, Yuanchen
  • Lung, Peter P.

Abstract

We examine the informational role of options across exercise prices under different market conditions. We analyze the influence of options' leverage effect, and market cycles on the cause-effect relation between stock and options markets based on an emerging options market--the Taiwan stock index options market. When aggregating market data irrespective of market cycles and options moneyness, we find that the equity market leads the options market. However, as we control options' moneyness and market cycles, we find that out-of-the-money options lead the stock market by up to 90Â min with more pronounced results in downtrends and periods of political tension. Our findings suggest that the informational role of options is interacted with leverage effect and market conditions.

Suggested Citation

  • Chan, Kam C. & Chang, Yuanchen & Lung, Peter P., 2009. "Informed trading under different market conditions and moneyness: Evidence from TXO options," Pacific-Basin Finance Journal, Elsevier, vol. 17(2), pages 189-208, April.
    • Handle: RePEc:eee:pacfin:v:17:y:2009:i:2:p:189-208
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927-538X(08)00006-1
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Wood, Robert A & McInish, Thomas H & Ord, J Keith, 1985. "An Investigation of Transactions Data for NYSE Stocks," Journal of Finance, American Finance Association, vol. 40(3), pages 723-739, July.
    2. Jennings, Robert & Starks, Laura, 1986. "Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets," Journal of Finance, American Finance Association, vol. 41(1), pages 107-125, March.
    3. Kam C. Chan & Louis T. W. Cheng & Peter P. Lung, 2004. "Net buying pressure, volatility smile, and abnormal profit of Hang Seng Index options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(12), pages 1165-1194, December.
    4. Back, Kerry, 1993. "Asymmetric Information and Options," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 435-472.
    5. Kalok Chan & Y. Peter Chung & Wai-Ming Fong, 2002. "The Informational Role of Stock and Option Volume," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1049-1075.
    6. Vijh, Anand M, 1990. "Liquidity of the CBOE Equity Options," Journal of Finance, American Finance Association, vol. 45(4), pages 1157-1179, September.
    7. Manaster, Steven & Rendleman, Richard J, Jr, 1982. "Option Prices as Predictors of Equilibrium Stock Prices," Journal of Finance, American Finance Association, vol. 37(4), pages 1043-1057, September.
    8. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, April.
    9. Anthony, Joseph H, 1988. " The Interrelation of Stock and Options Market Trading-Volume Data," Journal of Finance, American Finance Association, vol. 43(4), pages 949-964, September.
    10. G. Geoffrey Booth & Ji-Chai Lin & Teppo Martikainen & Yiuman Tse, 2002. "Trading and Pricing in Upstairs and Downstairs Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1111-1135.
    11. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, vol. 61(4), pages 409-425, October.
    12. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    13. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    14. Chiang, Raymond & Fong, Wai-Ming, 2001. "Relative informational efficiency of cash, futures, and options markets: The case of an emerging market," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 355-375, February.
    15. Hamilton, James D & Gang, Lin, 1996. "Stock Market Volatility and the Business Cycle," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 573-593, Sept.-Oct.
    16. Zhaohui Chen & Charles A. E. Goodhart, 1998. "Inferring Market Expectations Using Currency Option Price And Volume Data," World Scientific Book Chapters, in: Zhaohui Chen (ed.), Currency Options And Exchange Rate Economics, chapter 10, pages 183-196, World Scientific Publishing Co. Pte. Ltd..
    17. Bekaert, Geert & Wu, Guojun, 2000. "Asymmetric Volatility and Risk in Equity Markets," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 1-42.
    18. Sugato Chakravarty & Huseyin Gulen & Stewart Mayhew, 2004. "Informed Trading in Stock and Option Markets," Journal of Finance, American Finance Association, vol. 59(3), pages 1235-1258, June.
    19. Lockwood, Larry J. & McInish, Thomas H., 1990. "Tests of stability for variances and means of overnight/intraday returns during bull and bear markets," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1243-1253, December.
    20. Chan, Kalok & Chung, Y Peter & Johnson, Herb, 1993. "Why Option Prices Lag Stock Prices: A Trading-Based Explanation," Journal of Finance, American Finance Association, vol. 48(5), pages 1957-1967, December.
    21. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-152.
    22. Stephan, Jens A & Whaley, Robert E, 1990. "Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets," Journal of Finance, American Finance Association, vol. 45(1), pages 191-220, March.
    23. Pagano, Marco & Roell, Ailsa, 1996. "Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    24. David Easley & Maureen O'Hara & P.S. Srinivas, 1998. "Option Volume and Stock Prices: Evidence on Where Informed Traders Trade," Journal of Finance, American Finance Association, vol. 53(2), pages 431-465, April.
    25. Mayhew, Stewart & Sarin, Atulya & Shastri, Kuldeep, 1995. "The Allocation of Informed Trading across Related Markets: An Analysis of the Impact of Changes in Equity-Option Margin Requirements," Journal of Finance, American Finance Association, vol. 50(5), pages 1635-1653, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chang, Chuang-Chang & Hsieh, Pei-Fang & Lai, Hung-Neng, 2013. "The price impact of options and futures volume in after-hours stock market trading," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 984-1007.
    2. Doojin Ryu & Heejin Yang, 2018. "The directional information content of options volumes," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(12), pages 1533-1548, December.
    3. Lin, William T. & Tsai, Shih-Chuan & Zheng, Zhenlong & Qiao, Shuai, 2018. "Retrieving aggregate information from option volume," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 220-232.
    4. Li, Wei-Xuan & French, Joseph J. & Chen, Clara Chia-Sheng, 2017. "Informed trading in S&P index options? Evidence from the 2008 financial crisis," Journal of Empirical Finance, Elsevier, vol. 42(C), pages 40-65.
    5. Joyce Hsieh & Chien-Chung Nieh, 2010. "An overview of Asian equity markets," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 24(2), pages 19-51, November.
    6. Lee, Yen-Hsien & Wang, David K., 2016. "Information content of investor trading behavior: Evidence from Taiwan index options market," Pacific-Basin Finance Journal, Elsevier, vol. 38(C), pages 149-160.
    7. 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.
    8. Fei Ren & Mei-Ling Cai & Sai-Ping Li & Xiong Xiong & Zhang-HangJian Chen, 2023. "A Multi-market Comparison of the Intraday Lead–Lag Relations Among Stock Index-Based Spot, Futures and Options," Computational Economics, Springer;Society for Computational Economics, vol. 62(1), pages 1-28, June.
    9. Hsieh, Wen-liang G. & He, Huei-Ru, 2014. "Informed trading, trading strategies and the information content of trading volume: Evidence from the Taiwan index options market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 187-215.
    10. Chen, Zhang-HangJian & Ren, Fei & Yang, Ming-Yuan & Lu, Feng-Zhi & Li, Sai-Ping, 2023. "Dynamic lead–lag relationship between Chinese carbon emission trading and stock markets under exogenous shocks," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 295-305.
    11. Wu, Wei-Shao & Liu, Yu-Jane & Lee, Yi-Tsung & Fok, Robert C.W., 2014. "Hedging costs, liquidity, and inventory management: The evidence from option market makers," Journal of Financial Markets, Elsevier, vol. 18(C), pages 25-48.
    12. Ting-Huan Chang, 2011. "Risk preference and trading motivation measurement due to moneyness: evidence from the S&P 500 Index option market," Applied Financial Economics, Taylor & Francis Journals, vol. 21(14), pages 1049-1057.
    13. Rajesh Pathak & Kaushik Bhattacharjee & Nagi Reddy V., 2015. "Information Content of Derivatives under Varying Market Conditions and Moneyness: The Case of S&P CNX Nifty Index Options," Global Business Review, International Management Institute, vol. 16(2), pages 281-302, April.
    14. Lin, William T. & Tsai, Shih-Chuan & Zheng, Zhenlong & Qiao, Shuai, 2017. "Does options trading convey information on futures prices?," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 182-196.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen, Carl R. & Lung, Peter P. & Tay, Nicholas S. P., 2005. "Information flow between the stock and option markets: Where do informed traders trade?," Review of Financial Economics, Elsevier, vol. 14(1), pages 1-23.
    2. Carl R. Chen & Peter P. Lung & Nicholas S.P. Tay, 2005. "Information flow between the stock and option markets: Where do informed traders trade?," Review of Financial Economics, John Wiley & Sons, vol. 14(1), pages 1-23.
    3. Benjamin Blau & Chip Wade, 2013. "Comparing the information in short sales and put options," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 567-583, October.
    4. Du, Brian & Fung, Scott, 2018. "Directional information effects of options trading: Evidence from the banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 149-168.
    5. Muravyev, Dmitriy & Pearson, Neil D. & Paul Broussard, John, 2013. "Is there price discovery in equity options?," Journal of Financial Economics, Elsevier, vol. 107(2), pages 259-283.
    6. Chen, Carl R. & Diltz, J. David & Huang, Ying & Lung, Peter P., 2011. "Stock and option market divergence in the presence of noisy information," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2001-2020, August.
    7. Atilgan, Yigit, 2014. "Volatility spreads and earnings announcement returns," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 205-215.
    8. Brian Du, 2019. "Relative option liquidity and price efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1119-1135, May.
    9. Alejandro Bernales & Thanos Verousis & Nikolaos Voukelatos & Mengyu Zhang, 2020. "What do we know about individual equity options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 67-91, January.
    10. Delisle, R. Jared & Lee, Bong Soo & Mauck, Nathan, 2012. "The dynamic relation between short sellers, option traders, and aggregate returns," MPRA Paper 42566, University Library of Munich, Germany.
    11. Rourke, Thomas, 2014. "The delta- and vega-related information content of near-the-money option market trading activity," Journal of Financial Markets, Elsevier, vol. 20(C), pages 175-193.
    12. Jun Pan & Allen M. Poteshman, 2006. "The Information in Option Volume for Future Stock Prices," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 871-908.
    13. Kelley Bergsma & Vivien Csapi & Dean Diavatopoulos & Andy Fodor, 2020. "Show me the money: Option moneyness concentration and future stock returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(5), pages 761-775, May.
    14. Schlag, Christian & Stoll, Hans, 2005. "Price impacts of options volume," Journal of Financial Markets, Elsevier, vol. 8(1), pages 69-87, February.
    15. Zebedee, Allan A. & Kasch-Haroutounian, Maria, 2009. "A closer look at co-movements among stock returns," Journal of Economics and Business, Elsevier, vol. 61(4), pages 279-294, July.
    16. Byeong-Je An & Andrew Ang & Turan G. Bali & Nusret Cakici, 2014. "The Joint Cross Section of Stocks and Options," Journal of Finance, American Finance Association, vol. 69(5), pages 2279-2337, October.
    17. Andy Fodor & Kevin Krieger & James Doran, 2011. "Do option open-interest changes foreshadow future equity returns?," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 25(3), pages 265-280, September.
    18. Chang‐Mo Kang & Donghyun Kim & Junyong Kim & Geul Lee, 2022. "Informed trading of out‐of‐the‐money options and market efficiency," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(2), pages 247-279, June.
    19. Vinay Patel, 2015. "Price Discovery in US and Australian Stock and Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 27, July-Dece.
    20. Turkington, Joshua & Walsh, David, 2000. "Informed traders and their market preference: Empirical evidence from prices and volumes of options and stock," Pacific-Basin Finance Journal, Elsevier, vol. 8(5), pages 559-585, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:17:y:2009:i:2:p:189-208. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.