Volatility Information Trading in the Option Market

Sophie Xiaoyan Ni, Jun Pan, Allen M. Poteshman

Research output: Contribution to journalJournal articlepeer-review

125 Citations (Scopus)

Abstract

This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40% as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.
Original languageEnglish
Pages (from-to)1059-1091
Number of pages33
JournalJournal of Finance
Volume63
Issue number3
Early online date9 May 2008
DOIs
Publication statusPublished - Jun 2008

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics and Econometrics

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