Skip to main content
×
×
Home

Stealth Trading in Options Markets

  • Amber Anand (a1) and Sugato Chakravarty (a2)
Abstract

We investigate how price discovery occurs in the options markets through traders' trade size choice. By employing transactions data on all options traded on a sample of 100 firms, we show that informed traders fragment their orders into small (medium) trades for low (high) volume contracts. We also find that almost 60% of the price discovery occurs in the exchange with the largest market share for a given option, where informed traders favor medium size trades. Upon examining distinct option series for a given stock, we find that at-the-money calls display the highest information share.

Copyright
References
Hide All
Barclay, M. J., and Warner, J. B.. “Stealth and Volatility: Which Trades Move Prices?Journal of Financial Economics, 34 (1993), 281306.
Battalio, R.; Hatch, B.; and Jennings, R.. “Toward a National Market System for U.S. Exchange Listed Equity Options.” Journal of Finance, 59 (2004), 933962.
Biais, B., and Hillion, P.. “Insider and Liquidity Trading in Stock and Options Markets.” Review of Financial Studies, 74 (1994), 743780.
Black, F.Fact and Fantasy in the Use of Options.” Financial Analysts Journal, 31 (1975), 3641.
Brennan, M. J., and Cao, H. H.. “Information, Trade and Derivative Securities.” Review of Financial Studies, 9 (1996), 163208.
Brennan, M. J., and Subrahmanyam, A.. “The Determinants of Average Trade Size.” Journal of Business, 71 (1998), 125.
Cao, C.; Chen, Z.; and Griffin, J.. “Informational Content of Option Volume Prior to Takeovers.” Journal of Business, 78 (2005), 10731109.
Chakravarty, S.Stealth-Trading: Which Traders' Trades Move Stock Prices?Journal of Financial Economics, 61 (2001), 289307.
Chakravarty, S.; Gulen, H.; and Mayhew, S.. “Informed Trading in Stock and Options Markets.” Journal of Finance, 59 (2004), 12351257.
Chan, K.; Chung, Y. P.; and Fong, W. M.. “The Informational Role of Stock and Option Volume.” Review of Financial Studies, 15 (2002), 10491075.
Chan, K.; Chung, Y. P.; and Johnson, H.. “Why Option Prices Lag Stock Prices: A Trading Based Explanation.” Journal of Finance, 48 (1993), 19571967.
Chowdhry, B., and Nanda, V.. “Multimarket Trading and Market Liquidity.” Review of Financial Studies, 4 (1991), 483511.
de Jong, C.; Koedijk, K. G.; and Schnitzlein, C. R.. “Stock Market Quality in the Presence of a Traded Option.” Journal of Business, 79 (2006), 22432274.
Easley, D., and O'Hara, M.. “Adverse Selection and Large Trade Volume: The Implications for Market Efficiency.” Journal of Financial and Quantitative Analysis, 27 (1992), 185208.
Easley, D.; O'Hara, M.; and Srinivas, P.. “Option Volume and Stock Prices: Evidence on Where Informed Traders Trade.” Journal of Finance, 48 (1998), 19571967.
Engle, R. F., and Granger, C. W. J.. “Co-Integration and Error Correction Representation, Estimation and Testing.” Econometrica, 55 (1987), 251276.
Finucane, T. J.A New Measure of the Direction and Timing of Information Flow between Markets.” Journal of Financial Markets, 2 (1999), 135151.
Grossman, S. J.An Analysis of the Implications for Stock and Futures: Price Volatility of Program Trading and Dynamic Hedging Strategies.” Journal of Business, 61 (1988), 275298.
Hasbrouck, J.Measuring the Information Content of Stock Trades.” Journal of Finance, 46 (1991), 179207.
Hasbrouck, J.One Security, Many Markets: Determining the Contributions to Price Discovery.” Journal of Finance, 50 (1995), 11751199.
Hasbrouck, J.Intraday Price Formation in U.S. Equity Index Markets.” Journal of Finance, 58 (2003), 23752399.
John, K.; Koticha, A.; Narayanan, R.; and Subrahmanyam, M.. “Margin Rules, Informed Trading in Derivatives and Price Dynamics.” Working Paper, New York University (2000).
Kaul, G.; Nimalendran, M.; and Zhang, D.. “Informed Trading and Option Spreads.” Working Paper, University of Michigan (2002).
Kurov, A., and Lasser, D.. “Price Dynamics in the Regular and E-Mini Futures Markets.” Journal of Financial and Quantitative Analysis, 39 (2004), 365384.
Kyle, A. S.Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 13151335.
Lee, J., and Yi, C. H.. “Trade Size and Information-Motivated Trading in the Options and Stock Markets.” Journal of Financial and Quantitative Analysis, 36 (2001), 485501.
Lehmann, B. N.Some Desiderata for the Measurement of Price Discovery across Markets.” Journal of Financial Markets, 5 (2002), 259276.
Manaster, S., and Rendleman, R. J.. “Option Prices as Predictors of Equilibrium Stock Prices.” Journal of Finance, 37 (1982), 10431057.
Pan, J., and Poteshman, A. M.. “The Information in Option Volume for Stock Prices.” Working Paper, Massachusetts Institute of Technology (2003).
Schlag, C., and Stoll, H.. “Price Impacts of Option Volume.” Working Paper, Vanderbilt University (2002).
Stephan, J. A., and Whaley, R. E.. “Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets.” Journal of Finance, 45 (1990), 191220.
Vijh, A.Liquidity of the CBOE Equity Options.” Journal of Finance, 45 (1990), 11571179.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed