Informed Trading in the Index Option Market

51 Pages Posted: 7 Jun 2017 Last revised: 17 Aug 2019

See all articles by Andreas Kaeck

Andreas Kaeck

University of Sussex

Vincent van Kervel

Pontifical Catholic University of Chile

Norman Seeger

VU University Amsterdam

Date Written: June 5, 2017

Abstract

We propose a structural vector autoregressive (VAR) model of informed trading in option markets to analyze whether investors use options to trade on private information about the underlying price and/or the underlying's volatility. We decompose option order flow into exposures to the underlying asset (through the option delta) and its volatility (through the option vega). Our proposed methodological framework facilitates meaningfully aggregation of option order flows for different strike prices and maturities, and increases statistical power to identify informed trading. A fitted model confirms that S&P500 option trades are indeed informative about changes in both the underlying and volatility.

Keywords: Options, informed trading, price impact

Suggested Citation

Kaeck, Andreas and van Kervel, Vincent and Seeger, Norman, Informed Trading in the Index Option Market (June 5, 2017). TILEC Discussion Paper No. 2017-027; Paris December 2017 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2981332 or http://dx.doi.org/10.2139/ssrn.2981332

Andreas Kaeck

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

Vincent Van Kervel

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, RegiĆ³n Metropolitana 8331150
Chile

Norman Seeger (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 1512 (Phone)

HOME PAGE: http://www.norman-seeger.com

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