Volatility Information Trading in the Option Market
Posted: 28 Aug 2008
Date Written: August 27, 2008
This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40 percent as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.
Keywords: Volatility, Stock Options, Deriviatives, Information
JEL Classification: G12, G13, D82, M41
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