IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v34y2010i10p2370-2385.html
   My bibliography  Save this article

Does information drive trading in option strategies?

Author

Listed:
  • 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.

Suggested Citation

  • Fahlenbrach, Rüdiger & Sandås, Patrik, 2010. "Does information drive trading in option strategies?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2370-2385, October.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2370-2385
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00097-X
    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. 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.
    2. Ronn, Aimee Gerbarg & Ronn, Ehud I, 1989. "The Box Spread Arbitrage Conditions: Theory, Tests, and Investment Strategies," The Review of Financial Studies, Society for Financial Studies, vol. 2(1), pages 91-108.
    3. Joshua D. Coval & Tyler Shumway, 2001. "Expected Option Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 983-1009, June.
    4. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    5. 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.
    6. 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, June.
    7. 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.
    8. J. Scott Chaput & Louis H. Ederington, 2005. "Volatility trade design," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(3), pages 243-279, March.
    9. 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.
    10. 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.
    11. 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(1), pages 71-90, March.
    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. 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. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.
    3. Ai Jun Hou & Lars L. Nordén, 2018. "VIX futures calendar spreads," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(7), pages 822-838, July.
    4. Yang, Heejin & Kutan, Ali M. & Ryu, Doojin, 2019. "Volatility information trading in the index options market: An intraday analysis," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 412-426.
    5. 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.
    6. Hoque, Ariful & Le, Thi & Hasan, Morshadul & Abedin, Mohammad Zoynul, 2024. "Does market efficiency matter for Shanghai 50 ETF index options?," Research in International Business and Finance, Elsevier, vol. 67(PB).
    7. Ryan McKeon, 2016. "Option spread trades: Returns on directional and volatility trades," Journal of Asset Management, Palgrave Macmillan, vol. 17(6), pages 422-433, October.
    8. 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.
    9. 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.
    10. Chen, Sipeng & Li, Gang, 2023. "Why does option-implied volatility forecast realized volatility? Evidence from news events," Journal of Banking & Finance, Elsevier, vol. 156(C).
    11. Liu, Dehong & Liang, Yucong & Zhang, Lili & Lung, Peter & Ullah, Rizwan, 2021. "Implied volatility forecast and option trading strategy," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 943-954.
    12. Soniya Mohil & Reena Nayyar & Archana Patro, 2020. "When is informed trading more prevalent?—An examination of options trading around Indian M&A announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 1011-1029, June.
    13. Choy, Siu Kai & Wei, Jason, 2012. "Option trading: Information or differences of opinion?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2299-2322.
    14. Kaeck, Andreas & van Kervel, Vincent & Seeger, Norman J., 2022. "Price impact versus bid–ask spreads in the index option market," Journal of Financial Markets, Elsevier, vol. 59(PA).
    15. Ryu, Doojin & Yang, Heejin, 2019. "Who has volatility information in the index options market?," Finance Research Letters, Elsevier, vol. 30(C), pages 266-270.

    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. Choy, Siu Kai & Wei, Jason, 2012. "Option trading: Information or differences of opinion?," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2299-2322.
    2. 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.
    3. 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.
    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. 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.
    6. Hong, Hui & Sung, Hao-Chang & Yang, Jingjing, 2018. "On profitability of volatility trading on S&P 500 equity index options: The role of trading frictions," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 295-307.
    7. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.
    8. Bernales, Alejandro & Verousis, Thanos & Voukelatos, Nikolaos, 2020. "Do investors follow the herd in option markets?," Journal of Banking & Finance, Elsevier, vol. 119(C).
    9. Yang, Heejin & Kutan, Ali M. & Ryu, Doojin, 2019. "Volatility information trading in the index options market: An intraday analysis," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 412-426.
    10. Jeewon Jang & Jangkoo Kang & Jaeram Lee, 2023. "Who has an edge in trading index derivatives?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(3), pages 325-348, March.
    11. Goyal, Amit & Saretto, Alessio, 2009. "Cross-section of option returns and volatility," Journal of Financial Economics, Elsevier, vol. 94(2), pages 310-326, November.
    12. 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.
    13. Lin, William T. & Tsai, Shih-Chuan & Chiu, Peter, 2016. "Do foreign institutions outperform in the Taiwan options market?," The North American Journal of Economics and Finance, Elsevier, vol. 35(C), pages 101-115.
    14. Hoque, Ariful & Le, Thi & Hasan, Morshadul & Abedin, Mohammad Zoynul, 2024. "Does market efficiency matter for Shanghai 50 ETF index options?," Research in International Business and Finance, Elsevier, vol. 67(PB).
    15. Alfredo Ibáñez, 2008. "The cross-section of average delta-hedge option returns under stochastic volatility," Review of Derivatives Research, Springer, vol. 11(3), pages 205-244, October.
    16. Jonathan Raimana Chan & Thomas Huckle & Antoine Jacquier & Aitor Muguruza, 2021. "Portfolio optimisation with options," Papers 2111.12658, arXiv.org, revised Sep 2024.
    17. Huh, Sahn-Wook & Lin, Hao & Mello, Antonio S., 2015. "Options market makers׳ hedging and informed trading: Theory and evidence," Journal of Financial Markets, Elsevier, vol. 23(C), pages 26-58.
    18. Junmao Chiu & Huimin Chung & Keng-Yu Ho, 2014. "Fear Sentiment, Liquidity, and Trading Behavior: Evidence from the Index ETF Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(03), pages 1-25.
    19. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    20. Byun, Suk Joon & Jeon, Byoung Hyun & Min, Byungsun & Yoon, Sun-Joong, 2015. "The role of the variance premium in Jump-GARCH option pricing models," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 38-56.

    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:jbfina:v:34:y:2010:i:10:p:2370-2385. 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/jbf .

    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.