Price Pressures and Option Returns

75 Pages Posted: 4 Dec 2019 Last revised: 2 Oct 2020

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 on S&P500 Index and equity options computed using end-of-day closing prices are always higher compared to those based on any other price of the day. The difference between these returns can reach more than 100 bps per day. Price pressures combined with options market makers’ overnight inventory risks explain the results. We use an introduction of SPX night trading as a resolution of overnight uncertainty and are able to differentiate price pressure hypothesis from all other mispricing based explanations. Computing returns using first half of the day prices, where most of price discovery takes place, helps explain several anomalies in the literature and establish identical volatility pricing across equity and index options

Suggested Citation

Goyenko, Ruslan and Zhang, Chengyu, Price 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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