How Informed Investors Take Advantage of Negative Information in Options and Stock Markets

We examine whether and how investors establish positions in options when they have negative information in the U.S. markets from August 2004 to January 2009. Our empirical results show that options seem to be actively and effectively used for the exploitation of negative information. General trading volumes and bid-ask spreads of options remarkably increase like those of stocks as the short sellers increase their selling pressure. Notably, we find that the difference between a stock's traded price and its implied price from the options market reaches its peak about 2 weeks before the short sale trading activity reaches its peak. We also observe that synthetic short positions measured by this difference are preferred over OTM put positions by investors with negative information. Finally, economically significant returns based on a strategy using the difference in the traded and implied stock prices as a trading signal support our evidence. Moreover, these profits confirm the findings of the previous research which argue that options are shelters for informed investors.
Publisher
WILEY-BLACKWELL
Issue Date
2014-06
Language
ENG
Keywords

PRICES; EFFICIENCY; VOLUME; RETURNS; FUTURES; INDEX; ARBITRAGE; QUALITY; TRADERS; RISK

Citation

JOURNAL OF FUTURES MARKETS, v.34, no.6, pp.516 - 547

ISSN
0270-7314
DOI
10.1002/fut.21651
URI
http://hdl.handle.net/10203/188966
Appears in Collection
KGSF-Journal Papers(저널논문)
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