Decomposing Informed Trading in Equity Options

70 Pages Posted: 30 Mar 2024 Last revised: 8 May 2024

See all articles by Felipe Asencio

Felipe Asencio

Universidad de Chile

Alejandro Bernales

Universidad de Chile

Daniel González

Universidad de Chile

Richard Holowczak

City University of New York (CUNY) - Paul H. Chook Department of Information Systems & Statistics

Thanos Verousis

Vlerick Business School

Date Written: March 19, 2024

Abstract

We develop a multi-asset model to decompose informed trading into the components concerning the underlying stock value and the volatility in equity options. We isolate the stock value and volatility components by characterizing their distinct intraday price responses in contracts with different option deltas and vegas, respectively. The stock value (volatility) component represents on average 40.5% (19.0%) of the option spread. In daily empirical applications, we also show that informed trading components anticipate a 'Volmageddon' high-volatility event, and an increase in straddle trades is associated with a reduction (growth) in the relative contribution of the stock value (volatility) informed trading.

Keywords: Asymmetric information, volatility information, underlying stock value information, equity option markets, option order flow.

JEL Classification: D82, D84, G14, G13

Suggested Citation

Asencio, Felipe and Bernales, Alejandro and González, Daniel and Holowczak, Richard and Verousis, Thanos, Decomposing Informed Trading in Equity Options (March 19, 2024). Available at SSRN: https://ssrn.com/abstract=4765294 or http://dx.doi.org/10.2139/ssrn.4765294

Felipe Asencio

Universidad de Chile

Chile

Alejandro Bernales (Contact Author)

Universidad de Chile ( email )

Diagonal Paraguay 257
Santiago
Chile

HOME PAGE: http://www.alejandrobernales.com

Daniel González

Universidad de Chile

Chile

Richard Holowczak

City University of New York (CUNY) - Paul H. Chook Department of Information Systems & Statistics ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-1544 (Phone)
646-3121541 (Fax)

HOME PAGE: http://cisnet.baruch.cuny.edu/holowczak/

Thanos Verousis

Vlerick Business School ( email )

Library
REEP 1
Gent, BE-9000
Belgium

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