Predicting Volatility And The Information Content Of Informed Traders In An Option Market
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| Author | : Teng-Ching Huang |
| Publisher | : |
| Total Pages | : 38 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
We investigate the impact of information trading on predicting variation of implied volatility. First, we find that informed traders do trade in the index options market. The predicting biases of implied volatilities on the realized volatility are correlated with the information trading. Second, we find that delta market depth and bid-ask spread are correlated with the predicting variations in implied volatilities. Moreover, the difference between realized and implied volatility, bid-ask spread, and delta market depth are the determinants of price discovery in the option market. Third, the intraday patterns in realized volatility exhibit an inverse J-shape, which induces forecasting biases in implied volatilities. Finally, based on the performance of the volatility trading strategy, the result does not support efficient market hypothesis.
| Author | : Justin Vitanza |
| Publisher | : |
| Total Pages | : 83 |
| Release | : 2015 |
| Genre | : Information theory in finance |
| ISBN | : |
"In this paper, I present evidence that informed traders represent a large enough portion of option market activity to impact market prices. By entering the market on the long side before positive or negative events, they drive up both open interest and ask prices, while bid prices remain relatively stable. Seeing this pattern is indicative of either positive (when found in calls) or negative (for puts) future news announcements. When conditioning on these announcements, we also see that this pattern predicts return reactions. In particular, information embedded in option prices is useful in predicting earnings surprises and reactions to mergers. My primary measure of option information content is the change in the difference between implied volatility and realized daily volatility measured over the previous month. With hindsight, this difference rises prior to positive announcements for call options, while it rises prior to negative announcements for put options. This differential behavior provides strong evidence that these assets are not redundant in practice, as is often implied by option pricing models. Further, this information constitutes a primary risk factor in equity markets, as positive announcement risk is positively related to future returns due to the procyclicality of these announcements. Efficiently utilizing this information suggests a long-short trading strategy that yields over 1.2 percent per month. This strategy also completely explains the call-put volatility spread anomaly and is robust to controls for aggregate volatility sensitivity and known metrics that purport to monitor informed trading"--Page v.
| Author | : John L. Knight |
| Publisher | : Butterworth-Heinemann |
| Total Pages | : 428 |
| Release | : 2002 |
| Genre | : Business & Economics |
| ISBN | : 9780750655156 |
This text assumes that the reader has a firm grounding in the key principles and methods of understanding volatility measurement and builds on that knowledge to detail cutting edge modeling and forecasting techniques. It then uses a technical survey to explain the different ways to measure risk and define the different models of volatility and return.
| Author | : Joseph A. Cherian |
| Publisher | : |
| Total Pages | : 42 |
| Release | : 1997 |
| Genre | : Business & Economics |
| ISBN | : |
| Author | : Marco Klapper |
| Publisher | : Anchor Academic Publishing (aap_verlag) |
| Total Pages | : 73 |
| Release | : 2013-10 |
| Genre | : Business & Economics |
| ISBN | : 3954891727 |
This study examines the kind of information ‘informed’ traders have prior to a takeover announcement using options of target firms and elaborates on the cross-sectional relationship between options and stocks around takeover announcements. Financial markets are driven by information and by individuals that generate, process, and disclose this information to the market. Naturally, there have to be individuals who possess more information about a firm or a future event than other market participants. Mergers and acquisitions are particularly interesting events in this regard because they can have significant implications for the firms and stakeholders involved, as well as for the competitive dynamics in the respective market. Because of the large potential price impact of such transactions, traders with private information about a prospective takeover are expected to trade on this information to make a profit. But who are these ‘informed traders’ and what kind of information do they possess? This study tries to give a respond to this question.
| Author | : Charles Cao |
| Publisher | : |
| Total Pages | : |
| Release | : 2019 |
| Genre | : |
| ISBN | : |
Reliable excess returns from active portfolio management derive from informed trading. We investigate the information content of informed trading in the equity market and the options market. We find that informed equity trading and options trading are positively correlated in the time-series, but virtually uncorrelated cross-sectionally. Portfolio-level and stock-level analyses provide robust evidence that the cross-sectional return predictive power of informed trading in each market is distinct. Time-series analyses indicate that aggregate informed options trading is useful for predicting market returns, but that the amount of informed trading has declined significantly in more recent years. The time-series patterns of both our informed trading measures coincide closely with the decline in equity hedge fund excess returns.
| Author | : Chuang-Chang Chang |
| Publisher | : |
| Total Pages | : 42 |
| Release | : 2012 |
| Genre | : |
| ISBN | : |
This study follows the approach of Ni, Pan and Poteshman (2008) ndash; based upon the vega-weighted net demand for volatility ndash; to determine whether volatility information exists within the Taiwan options market. Our empirical results show that foreign institutional investors possess the strongest and most direct volatility information, which is realized by the delta-neutral options/futures trades. In addition, a few individual investors (less than 1% of individuals' trades) might be informed and realize their volatility information using the strangle strategy. Surprisingly, we find no evidence to support the predictive ability of the volatility demand from straddle trades, despite the widespread acknowledgement that such trades are sensitive to volatility.
| Author | : Bernard Dumas |
| Publisher | : |
| Total Pages | : 34 |
| Release | : 1996 |
| Genre | : Options (Finance) |
| ISBN | : |
Abstract: Black and Scholes (1973) implied volatilities tend to be systematically related to the option's exercise price and time to expiration. Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) attribute this behavior to the fact that the Black-Scholes constant volatility assumption is violated in practice. These authors hypothesize that the volatility of the underlying asset's return is a deterministic function of the asset price and time and develop the deterministic volatility function (DVF) option valuation model, which has the potential of fitting the observed cross-section of option prices exactly. Using a sample of S & P 500 index options during the period June 1988 through December 1993, we evaluate the economic significance of the implied deterministic volatility function by examining the predictive and hedging performance of the DV option valuation model. We find that its performance is worse than that of an ad hoc Black-Scholes model with variable implied volatilities.
| Author | : Zekun Wu |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2021 |
| Genre | : |
| ISBN | : |
This dissertation consists of three essays that explore the information content embedded in equity options. The results improve our understanding of the cross-section of option returns, informed trading in the options market, and the industry effect of IPOs. In the first essay, we study the relation between option-implied skewness (IS) and the crosssection of option returns under daily hedging to better understand skewness pricing in isolation from lower moments. Creating portfolios of delta-hedged (D-hedged) and delta-vega-hedged (DV-hedged) options with daily rebalancing, we find that IS is negatively (positively) related to call (put) option returns, but the relation to put options is statistically significant only during economic recessions. The relation is more substantial when the underlying stock has a larger market beta and when the firm has more severe information opacity. Our results suggest that investors' skewness preference grows stronger with greater market risk and lower information quality. In the second essay, we examined the informed trading in the options market before FDA drug advisory committee meetings. We find significant abnormal options trading volume before both meeting dates and report creation dates, particularly for small drug firms. Abnormal volume significantly predicts post-meeting stock returns. Informed traders prefer out-of-the-money options and choose maturities to cover the dates when reports are publicly released. They prefer to sell options close to the meeting date, perhaps to capture returns from both expected stock price changes and the sharp drop in implied volatility post-meeting. In the third essay, I investigate the effect of initial public offerings (IPOs) on industry competitors' options market. I find that rival firms' put (call) options volume increases (decreases) around IPOs, leading to price pressure on call options relative to put options as measured by the implied volatility spread. Rival firms' reaction in the options market also predicts the IPO firms' post-IPO stock performance. Lastly, rival firms with strong operating income experience less negative impact in the options market, suggesting competitive operation performance help stabilize rival firms' options market around IPOs.
| Author | : Tatjana Xenia Puhan |
| Publisher | : |
| Total Pages | : 37 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
This paper provides evidence that demand for equity index options has predictive power for future volatility beyond current, lagged volatility and the VIX in widely available, low-frequency data. The predictive power increases prior to macroeconomic announcements and exhibits a positive relation with investor uncertainty about macroeconomic news. Straddle positions that trade on the volatility informed index option demand yield annualized Sharpe Ratios that are up to twice as large as the Sharpe Ratios on a long index investment. Sharpe Ratios increase with the amount of volatility informed trading in the options market. In times of high volatility, the demand for straddle positions contains significantly more information and has an impact on option liquidity levels.
