Equity Options During the Flash Crash of 2010

Abstract:     
Using intraday trades and quotes OPRA data, we study the stock options market before, during, and after the Flash Crash of 2010. We extensively analyze 11 key option market variables to address two questions. First, has the options market provided any discernable signals that forewarned the crash? Second, has the recovery from the crash been fast and without a permanent impact? We find that none of the variables analyzed in this paper exhibits an extent of elevation that singles it out as a signal. The only possible exception to this result is the SPY ETF put option VPIN (Volume Synchronized Probability of Informed Trading): a statistic first computed by this paper and is largely affected by two large transactions in the early hours of May 6th, 2010. Almost all of the variables are indistinguishable three days after the crash from their pre-crash levels. This finding portrays a remarkable sense of resilience for equity options. We use GMM to estimate a minutely time decay specification for quoted spreads and implied volatility. We find that; first, almost all of the initial large shocks are transitory, which means that any permanent components are very small. Second, transitory shock half lives are measured in several minutes, not hours or days. Finally, the options market gets more skewed, but the magnitude is limited to a few percentage points in the immediate aftermath of the crash.

Number of Pages in PDF File: 61

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