The Microstructure of Individual Equity Options: Firm-Level and Common Effects on Liquidity

42 Pages Posted: 27 May 2013

See all articles by Thanos Verousis

Thanos Verousis

Essex Business School

Owain Ap Gwilym

Bangor Business School

Date Written: May 27, 2013


This study utilises an extensive dataset from three European exchanges, namely NYSE LIFFE Amsterdam, London and Paris, to study cross-sectional commonality in liquidity for individual equity options. We document that individual option liquidity is strongly associated with the underlying market activity, a finding that is consistent with the derivatives hedging theory. The implementation of the Premium Based Tick Size rule has lead to increases in liquidity. In contrast to previous studies that use daily data, we use an intraday dataset that allows us to construct a novel daily index of commonality in option liquidity. We show that the proportion of variance explained by a common liquidity factor is 15% for Amsterdam and 27% for London and Paris. In general, the first principal component explains about 11% of the variability of liquidity and the three main factors explain 15% of the variation at a sub-ticker level. Finally, commonality in liquidity for calls increases in an up market and decreases in a down market whereas commonality for puts is unaffected by market conditions.

Keywords: market microstructure, LIFFE, options, liquidity, bid-ask spread

JEL Classification: C22, G12, G14

Suggested Citation

Verousis, Thanos and ap Gwilym, Owain, The Microstructure of Individual Equity Options: Firm-Level and Common Effects on Liquidity (May 27, 2013). Available at SSRN: or

Thanos Verousis (Contact Author)

Essex Business School ( email )

United Kingdom

Owain Ap Gwilym

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom


Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics