Volatility Information in Index Option Demand

37 Pages Posted: 26 Jun 2013 Last revised: 26 Jul 2014

See all articles by Tatjana Xenia Puhan

Tatjana Xenia Puhan

University of Mannheim - Department of International Finance; Swiss Life Asset Managers

Date Written: July 26, 2014

Abstract

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.

Keywords: Option Demand, Open Interest, Volatility Information, Macroeconomic Announcements, Index Options

JEL Classification: D82, G10, G12, G14

Suggested Citation

Puhan, Tatjana Xenia, Volatility Information in Index Option Demand (July 26, 2014). Available at SSRN: https://ssrn.com/abstract=2277689 or http://dx.doi.org/10.2139/ssrn.2277689

Tatjana Xenia Puhan (Contact Author)

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Swiss Life Asset Managers ( email )

General-Guisan-Quai 40
Zurich, 8022
Switzerland

HOME PAGE: http://www.swisslife-am.com/de/home.html

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