Information and the Arrival Rate of Option Trading Volume

49 Pages Posted: 25 Nov 2020

See all articles by Mengyu Zhang

Mengyu Zhang

University of Kent, Kent Business School

Thanos Verousis

Essex Business School

Iordanis Kalaitzoglou

Audencia Nantes School of Management

Date Written: October 9, 2020

Abstract

Prior literature recognizes that liquidity is essential in understanding the information content of option trades. In this paper, we model the duration and volume jointly, for the first time, as a natural measure of options’ trading intensity and we associate it with differential degrees of information present in option trades. We report a highly significant association between option trading intensity with contemporaneous and future underlying volatility and returns, which is distinct from the effects of option duration and option trading volume and the O/S ratio. Finally, we show that our trading intensity measure and the O/S ratio are complementary in capturing informed trading in the option market.

Keywords: Options, stocks, trading volume, liquidity, information, conditional duration

JEL Classification: G12, G14

Suggested Citation

Zhang, Mengyu and Verousis, Thanos and Kalaitzoglou, Iordanis, Information and the Arrival Rate of Option Trading Volume (October 9, 2020). Available at SSRN: https://ssrn.com/abstract=3707991 or http://dx.doi.org/10.2139/ssrn.3707991

Mengyu Zhang

University of Kent, Kent Business School ( email )

CT2 7NP
United Kingdom

Thanos Verousis (Contact Author)

Essex Business School ( email )

United Kingdom

Iordanis Kalaitzoglou

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

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