Jumps in Option Prices and Their Determinants: Real-Time Evidence From the E-Mini S&P 500 Options Market

Abstract

We provide first-time evidence of the real-time characteristics and drivers of jumps in option prices. To this end, we employ high-frequency data from the 24-hour E-mini S&P 500 options market. We find that option prices do not jump simultaneously across strikes and maturities and are uncorrelated with jumps in the underlying futures price. We also find that 14% to 28% of detected option price jumps occur around scheduled news releases. However, it is illiquidity rather than the news content that drives these jumps. Evidence suggests that option traders increase bid-ask spreads to account for trading against investors who are skilled processors of public news releases. Interestingly, illiquidity does not drive jumps in the S&P 500 index options market, where we also find sizable and idiosyncratic price jumps.

Keywords: Asymmetric information, co-jump, limit order book market, liquidity, option market, news announcement

JEL Classification: C58, G10, G12, G13