Does Option Trading Have a Pervasive Impact on Underlying Stock Prices?

Abstract

The question of whether and to what extent option trading impacts underlying stock prices has been of interest since options began exchange-based trading in 1973. Recent research presents evidence of an informational channel through which option trading impacts stock prices by showing that option market makers’ stock trades to hedge new options positions cause the information reflected in option trading to be impounded into underlying equity prices. This paper provides evidence of a non-informational channel by presenting evidence consistent with the hypothesis that option market maker hedge rebalancing impacts stock return volatility and the probability of large stock price moves

Keywords: option trading, option open interest, delta-hedging, pinning, stock return volatility

JEL Classification: G12, G13, G14, G23