The Informational Content of Option Premiums PDF Download

Author: Paul Leonard Fackler
Publisher:
ISBN:
Category :
Languages : en
Pages : 260

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Author: Paul Leonard Fackler
Publisher:
ISBN:
Category : Equilibrium (Economics)
Languages : en
Pages : 105

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Author: Steven Manaster
Publisher:
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Category : Stock price forecasting
Languages : en
Pages : 50

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Author: Yonatan Navon
Publisher:
ISBN:
Category :
Languages : en
Pages : 382

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The objective of this thesis is to examine the information content of stock options in financial markets. A key question in financial economics is how information diffuses across markets and how quickly it is reflected in security prices. This thesis aims at exploring this question by investigating the informational role that options play in financial markets. This is achieved by exploring the joint cross section of option and bond prices, the informational role of options in seasoned equity offerings (SEOs), and the information content of options trading prior to announcements of changes to the S&P 500 Index.The thesis comprises three essays, each exploring the information content of equity options trading from a different angle. The first essay examines the joint cross section of option implied volatility and corporate bond returns. Theoretical and empirical work in finance suggests that stocks and bonds of the same issuing firm should share common risk factors. Therefore, new information about a firm should affect both its stock and bond prices. However, if one market offers trading incentives over other markets, informed traders and traders with better ability to process information may choose to trade in that market over the others. As a result, markets that provide advantages to informed traders will incorporate information prior to other markets. The empirical analysis in this chapter reveals that options trading is strongly predictive of corporate bond returns. A strategy of buying (selling) the portfolio with the lowest (highest) changes in option implied volatility yields an average monthly excess bond return of 1.03%. This strategy is statistically highly significant and economically very meaningful and indicates that information is incorporated into option prices prior to bond prices. In contrast, I find no evidence that bond prices incorporate information prior to option or stock prices. Since bond investors are generally sophisticated institutional investors who process information efficiently and the predictive ability of options is persistent, I conclude that informed trading rather than superior information processing abilities is responsible for the predictive ability of options.The second essay explores the information content of option implied volatility around the announcements and issue dates of SEOs. The literature on SEOs indicates that announcements and issue dates contain important information about firms and therefore provide profitable opportunities for traders with private information. While prior research has focused on the information content of short sales around SEOs, this study focuses on the information content of options which can act as an alternative for short selling. The empirical analysis provides evidence of informed trading in the options market around SEO announcements. Around SEO issue dates, I find that higher demand for put options is significantly related to larger issue discounts which is consistent with the manipulative trading hypothesis. The results in this study indicate that regulators should consider extending the short-sale restrictions of Rule 105 to restrict trading in related securities.Finally, the third essay investigates the information content of options prior to the S&P 500 Index inclusion and exclusion announcements. These announcements are unique events since they are not announced by the firm and, as stated by S&P, they should convey no new information. In addition, the large abnormal returns observed following these announcements make them distinctive ground for testing the informational role of options. Consistent with the notion that informed traders operate in the options market, the empirical results in this essay indicate that there is a significant relationship between options trading preceding index inclusion announcements and abnormal returns following these announcements. In contrast, I find no evidence for a relationship between options trading and abnormal returns following exclusion announcements.

Author: Isaac Faber
Publisher:
ISBN:
Category : Investment analysis
Languages : en
Pages : 212

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Author: Hun Y. Park
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Category :
Languages : en
Pages : 14

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Author: Li-Chin Jennifer Ho
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Category :
Languages : en
Pages :

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Prior studies show that option listing and subsequent trading improve a firm's information environment and that the price-earnings relation is influenced by characteristics of the information environment. Motivated by these research findings, we examine whether option trading is associated with changes in the information content of security prices with respect to future accounting earnings. We find that before the listing of a firm's options, the firm's security returns from the previous fiscal year convey little information regarding the current year's earnings changes. In contrast, the returns from the previous fiscal year are a significant variable in explaining the current year's earnings changes after option listing. Our findings are robust after potential confounding factors, such as firm size, financial press coverage, and institutional concentration, are controlled. Overall, the evidence is consistent with the claim that option trading enhances the informativeness of security prices with respect to future accounting earnings.

Author: Scott Murray
Publisher:
ISBN:
Category :
Languages : en
Pages : 61

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I investigate the relation between option prices and daily stock return serial correlation. I demonstrate that the variance ratio, calculated as the ratio of realized to implied stock return variance, has both a contemporaneous and predictive relation with stock return serial correlation. The ability of the variance ratio to predict future stock return serial correlation gives rise to a daily trading strategy that implements reversal trading on stocks predicted to exhibit large negative serial correlation and momentum trading on stocks with high predicted serial correlation. The trading strategy generates risk-adjusted returns in excess of 6.5% per year.

Author: Yoni Navon
Publisher:
ISBN:
Category :
Languages : en
Pages : 45

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This paper investigates the information content of options prior to the S&P 500 Index inclusion and exclusion announcements. These announcements are unique events since they are not announced by the firm and, as stated by S&P, they should convey no new information. In addition, the large abnormal returns observed following these announcements make them distinctive ground for testing the informational role of options. Consistent with the notion that informed traders operate in the options market, the empirical results in this essay indicate that there is a significant relationship between options trading preceding index inclusion announcements and abnormal returns following these announcements. In contrast, I find no evidence for a relationship between options trading and abnormal returns following exclusion announcements.

Author: Li Ge
Publisher: Open Dissertation Press
ISBN: 9781361379738
Category :
Languages : en
Pages :

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This dissertation, "Informational Content of Options Trading on Equity Returns and Corporate Events" by Li, Ge, 葛麗, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: This dissertation consists of three empirical studies about the informational content of options trading on subsequent equity returns and around major corporate events, such as mergers and acquisitions, and bankruptcies. The first chapter examines the informational content of options trading on acquirer announcement returns. I show that implied volatility spread predicts positively on the cumulative abnormal return (CAR), and implied volatility skew predicts negatively on the CAR. The predictability is much stronger around actual merger and acquisition (M&A) announcement days, compared with pseudo-event days. The prediction is weaker if pre-M&A stock price has incorporated part of the information, but stronger if acquirer's options trading is more liquid. Finally, I find that higher relative trading volume of options to stock predicts higher absolute CARs. The relation also exists among the target firms. In the second chapter, I reassess the presence of pre- bankruptcy-filing informed and insider trades by examining the information content of options trading before bankruptcy announcements. I find that bankruptcy filing returns are not significantly related to pre-filing insider stock trading. However, filing returns are significantly negatively related to pre-filing insider and informed options trading. The informational content of options trading reduces with options illiquidity and the amount of information impounded into pre-filing stock prices. In the third chapter, I use data on signed option volume to study which components of option volume predict returns and resolve the apparent inconsistency in the literature. I find no evidence that trades related to synthetic short positions in the underlying stocks contain more information than trades related to synthetic long positions. Purchases of calls that open new positions are the strongest predictor of returns, followed by call sales that close out existing purchased call positions. The signed O/S measures also predict announcement returns for both earnings announcements and unscheduled corporate events. Overall the results indicate that the role of options in providing embedded leverage is the most important channel why options trading predict stock returns. Subjects: Options (Finance)