Demand Pressures and Option Returns

61 Pages Posted: 4 Dec 2019 Last revised: 8 Mar 2021

See all articles by Ruslan Goyenko

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Chengyu Zhang

McGill University - Desautels Faculty of Management

Date Written: November 18, 2019

Abstract

Delta-hedged option and straddle returns of S&P500 Index and equity options computed using end-of-day (EOD) closing prices are always higher compared to those based on any other price of the day. The difference between these returns can easily reach more than 100 bps per day or week. Options end-users’ demand pressures contribute to deviation of EOD prices from fundamental values. Computing returns using first half of the day prices, which are less distorted by demand pressures, helps explain several anomalies in the literature and establish identical volatility pricing across equity and index options.

Suggested Citation

Goyenko, Ruslan and Zhang, Chengyu, Demand Pressures and Option Returns (November 18, 2019). Available at SSRN: https://ssrn.com/abstract=3489347 or http://dx.doi.org/10.2139/ssrn.3489347

Ruslan Goyenko (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Chengyu Zhang

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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