Price Pressures and Noise in Option Returns

51 Pages Posted: 4 Dec 2019 Last revised: 26 May 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 biased upward. The bias can reach more than 100 bps per day and is attributed to overnight inventory risk. An introduction of SPX options night trading enables hedging of overnight positions and as a result, negative night and positive day option returns flip the signs. Liquidity providers’ ‘preferred’ inventory level, and the aversion to unbounded downside risk by options writers explain the results. Using intra-day, instead of closing prices helps explain several anomalies and establish identical volatility pricing across equity and index options.

Suggested Citation

Goyenko, Ruslan and Zhang, Chengyu, Price Pressures and Noise in 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
97
Abstract Views
490
rank
289,364
PlumX Metrics