Option Trading Costs Are Lower than You Think

87 Pages Posted: 20 Mar 2015 Last revised: 7 Oct 2019

See all articles by Dmitriy Muravyev

Dmitriy Muravyev

Michigan State University - Department of Finance

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: October 4, 2019

Abstract

Conventional estimates of costs of taking liquidity in options markets are large. Nonetheless, options trading volume is high. We resolve this puzzle by showing that options price changes are predictable at high frequency and many traders time executions by buying (selling) when the option fair value is close to the ask (bid). Effective spreads of traders who time executions are less than 40% of the size of conventional measures, and the overall average effective spread is one-quarter smaller than conventional estimates. Price impact measures are also affected. These findings alter conclusions about the after-cost profitability of options trading strategies.

Keywords: Execution timing, trading costs, effective spread, liquidity, equity options, algorithmic trading

JEL Classification: G14, G13

Suggested Citation

Muravyev, Dmitriy and Pearson, Neil D., Option Trading Costs Are Lower than You Think (October 4, 2019). Available at SSRN: https://ssrn.com/abstract=2580548 or http://dx.doi.org/10.2139/ssrn.2580548

Dmitriy Muravyev (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0490 (Phone)
217-244-9867 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
807
Abstract Views
3,375
rank
33,451
PlumX Metrics