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

25 Pages Posted: 10 Nov 2016 Last revised: 26 May 2020

See all articles by Sophie Xiaoyan Ni

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU)

Neil D. Pearson

University of Illinois at Urbana-Champaign - Department of Finance

Allen M. Poteshman

University of Illinois at Urbana-Champaign - Department of Finance

Joshua S. White

University of Illinois at Urbana-Champaign - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 19, 2020

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

Suggested Citation

Ni, Sophie Xiaoyan and Pearson, Neil D. and Poteshman, Allen M. and White, Joshua S., Does Option Trading Have a Pervasive Impact on Underlying Stock Prices? (May 19, 2020). Available at SSRN: https://ssrn.com/abstract=2867461 or http://dx.doi.org/10.2139/ssrn.2867461

Sophie Xiaoyan Ni (Contact Author)

Hong Kong Baptist University (HKBU) ( email )

Department of Economics
Kowloon, Hong Kong
Hong Kong

HOME PAGE: http://sites.google.com/site/sophiexni/

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)

Allen M. Poteshman

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

340 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-265-0565 (Phone)
217-244-3102 (Fax)

HOME PAGE: http://www.business.uiuc.edu/poteshma

Joshua S. White

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

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 244-1166 (Phone)

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