Asymmetric Volatility and Trading Activity in Index Futures Options

Posted: 22 May 2005

See all articles by Kam C. Chan

Kam C. Chan

Pace University

Louis T. W. Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Peter P. Lung

University of Dayton

Abstract

We examine the impact of option trading activity on implied volatility changes to returns in the index futures option market. Controlling for option moneyness, delta-to-option-premium ratio, and liquidity, we find that net buying pressure, profit-maximization behavior, and liquidity are interrelated and affect asymmetric responses of implied volatilities to returns. Implied volatilities of options with more liquidity, a higher exercise price, and a higher delta-to-option-premium ratio have the most profound asymmetric response.

Keywords: Futures options, implied volatility, asymmetric response

JEL Classification: G13

Suggested Citation

Chan, Kam C. and Cheng, Louis T. W. and Lung, Peter P., Asymmetric Volatility and Trading Activity in Index Futures Options. Financial Review, Vol. 40, No. 3, August 2005; Pace University Accounting Research Paper No. 2005/02. Available at SSRN: https://ssrn.com/abstract=727343

Kam C. Chan (Contact Author)

Pace University ( email )

Lubin School of Business
Pleasantville, NY 10570
United States

Louis T. W. Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Peter P. Lung

University of Dayton ( email )

300 College Park
Dayton, OH 45469
United States

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