One Session Options: Playing the announcement lottery?

29 Pages Posted: 22 Mar 2021

See all articles by Lee A. Smales

Lee A. Smales

University of Western Australia

Zhangxin Frank Liu

The University of Western Australia Business School

Cameron Robertson

affiliation not provided to SSRN

Date Written: February 26, 2021

Abstract

One session options (OSO) are unique financial instruments that perfectly fit the criteria for a lottery-type asset; a low-price (average premium of 1 b.p.) coupled with a relatively small probability of a large payoff. Using intra-day data for over 12.8 million intra-day option contracts on the 3-Year Treasury Bond, we examine trading behaviour in the OSO market over the period 2002-2019. We find that trading volume is higher on days with a major macroeconomic announcement, and concentrated earlier in the trading session, prior to the data release. Trading volume tends to be higher when there is a difference of opinion surrounding the announcement outcome or when the level of economic policy uncertainty is higher. Trading in OSO has some predictive value for the surprise component of the macroeconomic announcement, but this does not translate into economic profits. While there is a positive option payoff on average, the average net profit is negative once premiums are accounted for. Our results are robust to different measures of uncertainty, market activity, and model form. It seems likely that OSO trading behaviour is best explained by ‘differences of opinion’.

Keywords: Lottery-like assets, One Session Options, Trading Volume, Trading Behaviour

JEL Classification: G10, G12, G14

Suggested Citation

Smales, Lee A. and Liu, Zhangxin (Frank) and Robertson, Cameron, One Session Options: Playing the announcement lottery? (February 26, 2021). Available at SSRN: https://ssrn.com/abstract=3793414 or http://dx.doi.org/10.2139/ssrn.3793414

Lee A. Smales (Contact Author)

University of Western Australia ( email )

UWA Business School
35 Stirling Highway
Perth, Western Australia 6009
Australia

Zhangxin (Frank) Liu

The University of Western Australia Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Cameron Robertson

affiliation not provided to SSRN

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