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The relationship between index option moneyness and relative liquidity

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  • Cheri Etling
  • Thomas W. Miller, Jr.

Abstract

Previous research has implicitly assumed, or even suggested, that the relationship between option moneyness and liquidity is quadratic with liquidity maximized for at‐the‐money options. This study investigated the nature of the relationship between moneyness and three liquidity proxies for options on the Standard & Poor’s (S&P) 100 and S&P 500 indexes. With bid – ask spreads, volume and time between quotes as liquidity proxies, statistical analysis rejected the hypothesis of a simple quadratic relationship between moneyness and liquidity in these markets. Although liquidity was maximized near the money, liquidity did not decrease symmetrically as option strikes moved deeper in the money or deeper out of the money. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:971–987, 2000

Suggested Citation

  • Cheri Etling & Thomas W. Miller, Jr., 2000. "The relationship between index option moneyness and relative liquidity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 20(10), pages 971-987, November.
    • Handle: RePEc:wly:jfutmk:v:20:y:2000:i:10:p:971-987
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    Cited by:

    1. Wing-Keung Wong & Howard Thompson & Kweehong Teh, 2011. "Was there Abnormal Trading in the S&P 500 Index Options Prior to the September 11 Attacks?," Multinational Finance Journal, Multinational Finance Journal, vol. 15(1-2), pages 1-46, March - J.
    2. Adrian C. H. Lei, 2015. "Price and Volume Effects of Exchange‐Traded Barrier Options: Evidence from Callable Bull/Bear Contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(11), pages 1042-1066, November.
    3. Zhiguang Wang & Scott W. Fausti & Bashir A. Qasmi, 2012. "Variance risk premiums and predictive power of alternative forward variances in the corn market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(6), pages 587-608, June.
    4. Sergey Nasekin & Wolfgang Karl Hardle, 2020. "Model-driven statistical arbitrage on LETF option markets," Papers 2009.09713, arXiv.org.
    5. Doojin Ryu & Jinyoung Yu, 2021. "Informed options trading around holidays," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(5), pages 658-685, May.
    6. Wolfgang Schadner & Joshua Traut, 2022. "Estimating Forward-Looking Stock Correlations from Risk Factors," Mathematics, MDPI, vol. 10(10), pages 1-19, May.

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