Jumps in Option Prices and Their Determinants: Real-Time Evidence from the E-Mini S&P 500 Option Market

Abstract

We provide first-time evidence of the real-time characteristics and drivers of jumps in option prices. To this end, we employ high frequency data from the 24-hour E-mini S&P 500 options market. We find that option prices do not jump simultaneously across strikes and maturities and are uncorrelated with jumps in the underlying futures price. 14% to 28% of detected option price jumps occur around scheduled news releases. However, it is illiquidity rather than the news content that drives jumps. Evidence suggests that option traders increase bid-ask spreads to account for trading against investors who are skilled processors of public releases. Interestingly, illiquidity does not drive jumps in the highly liquid S&P 500 index options market, where we also find sizable and idiosyncratic price jumps.

Keywords: Co-Jumps, Jumps, Informed Traders, Liquidity, Option Markets, Scheduled News Announcements

JEL Classification: C58, G10, G12, G13