Index Option Trading Activity and Market Returns

67 Pages Posted: 22 Jun 2016 Last revised: 20 May 2018

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Alexander Kurov

West Virginia University - College of Business & Economics

Dmitriy Muravyev

Boston College - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: May 17, 2018

Abstract

Do order flows in index derivatives play an informational role? Index put order flow on the International Securities Exchange positively and robustly predicts S&P 500 index returns. This result obtains symmetrically for net put buying and selling. We explore rationales for our findings, which include panic driven put buying during market declines, demand for crash insurance, and the notion that market makers trade on information in options markets. The last explanation is the one most consistent with our analysis. Supporting this explanation, we find that the predictive ability of put order flow increases when the differential between bid-to-bid and ask-to-ask returns is higher.

Keywords: index options, order flow, information, market efficiency

JEL Classification: G12, G14

Suggested Citation

Chordia, Tarun and Kurov, Alexander and Muravyev, Dmitriy and Subrahmanyam, Avanidhar, Index Option Trading Activity and Market Returns (May 17, 2018). Available at SSRN: https://ssrn.com/abstract=2798390 or http://dx.doi.org/10.2139/ssrn.2798390

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Alexander Kurov

West Virginia University - College of Business & Economics ( email )

P.O. Box 6025
Morgantown, WV 26506
United States

Dmitriy Muravyev

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
2177213772 (Phone)

HOME PAGE: http://www2.bc.edu/dmitriy-muravyev/

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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