Download or read book Informed Trading and Option Spreads written by Gautam Kaul and published by . This book was released on 2006 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We assess the presence and nature of strategic trading by informed investors in the options market. Specifically, we develop and test a model for the spread of an option that directly captures the effects of strategic trading by informed traders. We show that the underlying stock's spread has an important impact on the option spreads due to the hedging activities of option market makers. The initial hedging costs explain half the effective spread of at-the-money or in-the-money options. For out-of-the-money options, initial hedging costs explain less than one third of the spread, but nevertheless play an important economic role. Rebalancing costs associated with hedging are much smaller than the theoretical values, however. This suggests that although option dealers hedge their positions, they do not hold their positions for long. We also find that the adverse selection component of the underlying stock's spread explains a significant fraction of the option spread. More importantly, contrary to conventional wisdom, adverse selection costs are higher for (the most actively traded) at-the-money or slightly out-of-the-money contracts relative to out-of-the money options. The results of the array of tests conducted in this paper, taken together, suggest that informed traders trade strategically in options markets, recognizing the trade-off between leverage and transactions costs associated with option contracts of different moneyness.

Download or read book Vertical Option Spreads written by Charles Conrick, IV and published by John Wiley & Sons. This book was released on 2017-04-26 with total page 259 pages. Available in PDF, EPUB and Kindle. Book excerpt: Make trades on vertical options spreads with the precision of a laser beam Vertical Options Spreads is a combination of a bona-fide academic research-based study and a complete method to trade credit and debit spreads, along with other complex option combination trades such as iron condors and butterflies. Here, the author has accumulated five years of daily data on the ETF, SPY and provided historical evidence of actual win rates at specific multiples of entry points, both in time and price level. For example, traders will be able to use the weekly options, pick a level of risk and return desired, learn how to place the trade, and then discover the actual percent return that the trade would have yielded. This must-have resource includes the basics of option trading and contains references to many excellent works by other authors that explore more about the intricacies of option mechanics and trading. It is far more than an analysis of one specific asset, SPY, featuring a study of probability theory and how it has applied to trading over the past five years, including the highly volatile 2007 to 2009 time frame and the more "normal" 2010 to 2012 time period. The book offer a thorough understanding of how price movement, actual volatility, and implied volatility all provide a complex but workable web in which the informed trader can generate excellent returns. However, the trader must have the discipline to act within the confines of probability and the "law" of large numbers refusing to place trades based on gut feelings or hunches. Offers high-probability based trading that uses the new weekly options Contains handy interactive worksheets that allow traders to select their own risk/return with precision Includes a website with daily and weekly information on the estimate of the actual standard deviation points on the price spectrum Vertical Options Spreads offers traders a research-based guide for trading Standard & Poors 500 ETF, SPY using historic and estimated probabilities and returns that will give them an edge in the marketplace.

Download or read book The Allocation of Informed Trading Across Related Markets written by Stewart Mayhew and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the impact of changes in equity-option margin requirements on the liquidity of options and underlying stock markets. We find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, options spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks, but option spreads increased. Overall, our results indicate that uninformed traders are more sensitive to the margin dimension of trading costs.

Download or read book The nature of informed option trading written by Marco Klapper and published by GRIN Verlag. This book was released on 2013-09-25 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: Master's Thesis from the year 2013 in the subject Business economics - Investment and Finance, grade: 8.5 (A+), Erasmus University Rotterdam (Rotterdam School of Management), language: English, abstract: This thesis examines the kind of information “informed” traders have prior to a takeover announcement using options of target firms. I find that option liquidity rises before a takeover announcement, indicating the presence of informed traders. Using 2,390 M&A events, I show that the implied volatility (IV) skew and the relative option-to-stock trading volume O/S predict negatively on target announcement returns, but that the difference between implied volatilities of calls and puts (IV spread) has no predictive power. The main results indicate that the predictive power of these three informed option trading proxies increases if target management is entrenched and if the bidder and the target are in the same industry. I conclude that informed trading is partially driven by industry insiders with specific knowledge about the future acquisition. However, the results are only significant for one or two informed option trading proxies at a time.

Download or read book Informed Option Trading Strategies written by Cyriel de Jong and published by . This book was released on 2004 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use a sequential trade model to clarify two mechanisms following the introduction of an option that may lead to increased efficiency in the underlying. On the one hand, market makers learn from trades in the option market and set more accurate prices. On the other hand, the proportion of informed traders in the stock market may be altered depending on the informed traders' strategies. If insiders trade a larger fraction than uninformed traders in the stock, for example because the immediate profits in the stock are larger, spreads in the stock widen, and price errors may increase. This reduces the efficiency increase from the 'learning' effect, possibly to the extent that overall efficiency deteriorates. We use simulations to analyze the resulting impact in a dynamic setting. For realistic parameter values we find that option trading leads to lower price errors in the underlying. The more popular options are, the more quickly information is incorporated in the underlying prices. However, uninformed traders do not necessarily benefit from this speedier convergence. Their stock performance crucially depends on the insider's trading strategy and the fraction of informed trading.

Download or read book Volatility Information Trading and Its Implications for Information Asymmetry Option Spreads and Implied Volatility Skew written by Wei Quan and published by . This book was released on 2013 with total page 125 pages. Available in PDF, EPUB and Kindle. Book excerpt: Information asymmetry is a critical element in today's financial markets. While asymmetric information related to directional information trading has been extensively studied in the existing literature, there is limited research and evidence on how volatility information trading impacts the options market. This dissertation studies, both theoretically and empirically, the behaviors of volatility information traders in options markets and the implications of their behaviors on information asymmetry and options pricing. I develop a model in which investors can trade multiple option contracts with varying strikes under an asymmetric framework. I show that volatility information trading is more likely to occur in Out of The Money (OTM) options if the overall presence of informed traders is low or if the relative liquidity in OTM options is better than At The Money (ATM) options. Moreover, I show that due to the variation in implicit leverage embedded in the option contracts, the OTM option contract contains a higher volatility information risk than the ATM option contract in equilibrium. In addition, I show that this volatility information risk differential plays a central role in forming the spread structure within an option series with the same underlying asset. Finally, I show that the shape of implied volatility skew (smile) is jointly determined by volatility uncertainty and heterogeneous information risk across the option contracts. I empirically examine the implications of my theory using US equity options data, including two intra-day trade and quote datasets from the Chicago Board Option Exchange (CBOE). I estimate the Volume-Synchronized Probability of Informed Trading (VPIN) variable to measure the volatility information risk in the option market. I show that OTM contracts, on average, have a higher probability of information trading than ATM contracts. I also document that volatility risk explains a considerable proportion of the spread variations in the US equity options market. Finally, I provide evidence that the difference in information asymmetry across strike prices not only helps to explain the dynamics of implied volatility skew but also has a significant impact on the degree to which a change in historical volatility affects the shape of the implied volatility skew.

Download or read book Option Spread Trading written by Russell Rhoads and published by John Wiley & Sons. This book was released on 2011-01-11 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt: A practical guide to unlocking the power of option spreads When dealing with option spreads your looking to purchase one option in conjunction with the sale of another option. If managed properly, these spreads can provide experienced investors with the potential for large returns without undertaking a great deal of risk. Option Spread Trading provides a comprehensive, yet easy-to-understand explanation of option spreads, and shows you how to select the best spread strategy for any given market outlook. Along the way, author Russell Rhoads discusses spread strategies that can be used to profit from a strong up or down directional move in a stock, a stagnant market, or a highly volatile market. He also details how you can harness the leverage of options to create a low-risk position that provides the potential for a big profit. All manner of spreads are covered, from calendar and horizontal spreads to vertical and diagonal spreads Highlights how you can monitor and adjust an existing spread position and provides tips on how to exit a spread trade Includes exercises and examples to test and reinforce your knowledge of the concepts presented Option spread trading has become increasingly popular with active traders and investors. Gain a better understanding of this powerful approach with Option Spread Trading as your guide.

Download or read book Informed Trading in Options Markets and Its Information Value written by Justin Vitanza and published by . This book was released on 2015 with total page 83 pages. Available in PDF, EPUB and Kindle. Book excerpt: "In this paper, I present evidence that informed traders represent a large enough portion of option market activity to impact market prices. By entering the market on the long side before positive or negative events, they drive up both open interest and ask prices, while bid prices remain relatively stable. Seeing this pattern is indicative of either positive (when found in calls) or negative (for puts) future news announcements. When conditioning on these announcements, we also see that this pattern predicts return reactions. In particular, information embedded in option prices is useful in predicting earnings surprises and reactions to mergers. My primary measure of option information content is the change in the difference between implied volatility and realized daily volatility measured over the previous month. With hindsight, this difference rises prior to positive announcements for call options, while it rises prior to negative announcements for put options. This differential behavior provides strong evidence that these assets are not redundant in practice, as is often implied by option pricing models. Further, this information constitutes a primary risk factor in equity markets, as positive announcement risk is positively related to future returns due to the procyclicality of these announcements. Efficiently utilizing this information suggests a long-short trading strategy that yields over 1.2 percent per month. This strategy also completely explains the call-put volatility spread anomaly and is robust to controls for aggregate volatility sensitivity and known metrics that purport to monitor informed trading"--Page v.

Download or read book Advanced Option Trading written by Sankar Srinivasan and published by Srinivasan Sankara Narayanan. This book was released on 2023-07-20 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Advamced Option Trading" is your go-to guide, perfect for both beginners and seasoned traders. This easy-to-understand book demystifies the complexities of options trading, offering practical strategies to boost your confidence in the market. We focus on simplicity, making sure you grasp crucial concepts like call options, put options, risk management, and technical analysis. Dive into a wealth of strategies suited for various market conditions—whether it's a bullish, bearish, or neutral outlook. Learn the ins and outs of buying calls and puts, selling covered calls, creating vertical spreads, and executing straddles and strangles. Our step-by-step instructions, paired with clear entry and exit points, empower you to maximize profits while effectively managing risk. Take your trading to the next level by incorporating technical and fundamental analysis. Uncover popular technical indicators, spot support and resistance levels, and analyze chart patterns. Evaluate company fundamentals, review financial statements, and leverage industry trends to make well-informed trading decisions. Recognizing the role of emotions and psychology in successful trading, our book offers valuable guidance on managing fear, greed, and maintaining discipline. Develop a resilient mindset to confidently navigate the challenges of options trading. Packed with real-life examples, case studies, and practical tips, "Advanced Option Trading" equips you with the tools, knowledge, and strategies needed for success. Whether you're a newcomer or an experienced trader, this book will elevate your options trading skills. Written by Sankar Srinivasan, a Certified Market Professional with over 20 years of experience at the National Stock Exchange of India.

Download or read book Margin Rules Informed Trading in Derivatives and Price Dynamics written by Kose John and published by . This book was released on 2008 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyze the impact of option trading and margin rules on the behavior of informed traders and on the microstructure of stock and option markets. In the absence of binding margin requirements, the introduction of an options market causes informed traders to exhibit a relative trading bias towards the stock because of its greater information sensitivity. In turn, this widens the stock's bid-ask spread. But when informed traders are subject to margin requirements, their bias towards the stock is enhanced or mitigated depending on the leverage provided by the option relative to the stock, leading to wider or narrower stock bid-ask spreads. The introduction of option trading, with or without margin requirements, unambiguously improves the informational efficiency of stock prices. Margin rules improve market efficiency when stock margins and options margins (relative to stock margins) are sufficiently large or small but not when they are of moderate size.

Download or read book Option Day Trading A Beginner s Guide to Option Day Trading written by Chetan Singh and published by Chetan Singh. This book was released on with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: Option Day Trading: A Beginner's Guide to Option Day Trading" is the perfect book for anyone who wants to learn how to trade options. Whether you're a complete beginner or an experienced trader looking to improve your skills, this book provides a complete guide to options day trading. The options trading book covers all the essential concepts and terminology that you need to know to get started with options trading. It explains the advantages and risks of options trading, the different types of options, and the key factors that affect option pricing. In addition, the options trading books for beginners cover popular option trading strategies, including long calls and puts, vertical spreads, butterfly spreads, straddles, strangles, and iron condors. It provides tips on how to choose the right strategy for different market conditions, and how to manage risk through position sizing and trade management. Finally, the day trading options book covers the psychology of trading and how to overcome common emotional pitfalls, as well as more advanced topics such as volatility trading, options on futures, and trading for income.

Download or read book Options Market Makers Hedging and Informed Trading written by Sahn-Wook Huh and published by . This book was released on 2014 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a model to analyze the effects of hedging activities by options market makers (OMMs) facing informed trading. The model suggests that OMMs' hedging activities motivated by the adverse-selection risk lead to wider spreads in both stock and options markets. The hedging effect on spreads is more pronounced in the options market than in the stock market. The effect is larger when the OMMs hedge with the underlying asset than with other options. In addition, hedging activities by the OMMs significantly alter the trading strategies of informed traders. Our empirical tests provide evidence consistent with the key implication of our model.

Download or read book Bid Ask Spread and Liquidity Searching Behaviour of Informed Investors in Option Markets written by Alejandro Bernales and published by . This book was released on 2019 with total page 16 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show evidence of a liquidity searching behaviour of informed investors in option listings, which was also found by Collin-Dufresne and Fos (2015) using stock markets. Nevertheless, and differently from Collin-Dufresne and Fos (2015), we find that the option bid-ask spread may be still a good proxy for informed trading, despite of the liquidity searching behaviour of informed agents. We show an upward trend in the option bid-ask spread after option introductions (as informed traders avoid trading in initial periods after listing dates due to the low liquidity environment), which is steeper for options with high chances of information asymmetries.

Download or read book Modeling the Impacts of Market Activity on Bid ask Spreads in the Option Market written by Young-Hye Cho and published by . This book was released on 1999 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we examine the impact of market activity on the percentage bid-ask spreads of S & P 100 index options using transactions data. We propose a new market microstructure theory which we call derivative hedge theory, in which option market percentage spreads will be inversely related to the option market maker's ability to hedge his positions in the underlying market, as measured by the liquidity of the latter market. In a perfect hedge world, spreads arise from the illiquidity of the underlying market, rather than from inventory risk or informed trading in the option market itself. We find option market volume is not a significant determinant of option market spreads. This finding leads us to question the use of volume as a measure of liquidity and supports the derivative hedge theory. Option market spreads are positively related to spreads in the underlying market, again supporting our theory. However, option market duration does affect option market spreads, with very slow and very fast option markets both leading to bigger spreads. The fast market result would be predicted by the asymmetric information theory. Inventory model predicts big spreads in slow markets. Neither result would be observed if the underlying securities market provided a perfect hedge. We interpret these mixed results as meaning that the option market maker is able to only imperfectly hedge his positions in the underlying securities market. Our result of insignificant options volume casts doubt on the price discovery argument between stock and option market (Easley, O'Hara, and Srinivas (1998)). Asymmetric information costs in either market are naturally passed to the other market maker's hedgeing and therefore it is unimportant where the informed traders trade.

Download or read book Informed Trading and the Bid ask Spread written by Richard E. Cook and published by . This book was released on 1991 with total page 336 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Spread Trading written by Greg Jensen and published by John Wiley & Sons. This book was released on 2009-05-13 with total page 404 pages. Available in PDF, EPUB and Kindle. Book excerpt: A proven,easy-to-understandmethod for makingmoney with options "If you've never invested in the stock market,this is the book for you. If you've been investingfor years . . . this is still the book for you. A fantastic introduction to options." —Jon "DOCTOR J" Najarian, Co-founder, OptionMonster.com Spread trading-the practice of combining optiontrades and adjusting them over time-is being used successfullyby more and more professional traders. In this book, Greg Jensenshows nonprofessionals the tremendous advantages thissafe and profitable method offers. In simple and precise terms, Spread Trading providesreaders with all the essential tools to begin trading options.It explains, in nine simple steps, the basics of puts, calls,strike prices, and spreads-assuming no prior knowledge onyour part-and tells how to profit no matter what the market does.The author has helped thousands of people achieve successimplementing this approach, and with Spread Trading, hecontinues to educate individuals on the benefits of trading thisway, showing you how to make money while reducing risk. Building his lessons around the entertaining story oftwo ordinary guys figuring out how to trade options with each other,Jensen offers more than dry formulas-he relates the sense andthe intuition of trading options in a way that is simple,methodical, and easy to follow.

Download or read book The Complete Book of Option Spreads and Combinations written by Scott Nations and published by John Wiley & Sons. This book was released on 2014-10-08 with total page 278 pages. Available in PDF, EPUB and Kindle. Book excerpt: Get a handle on option spreads to hike profit and squash loss The Complete Book of Option Spreads and Combinations is the definitive educational resource and reference guide for using option spreads and other common sense option strategies. This useful guide shows readers how to select the right strategy for their market outlook and risk/reward comfort level by describing the inner workings of each strategy and how they are affected by underlying market movements, implied volatility, and time decay. Even more importantly, readers will understand where each strategy performs well, and the market conditions where each should be avoided. Once the proper strategy is selected, readers will learn how to identify the best options to use based on "moneyness" and time to expiration. The companion website features tools including an option pricing tool and implied volatility calculator to help all traders implement these concepts effectively. There are many different types of spreads, and while less risky than other option strategies in general, they are more complex, with more variables to monitor. This guide serves as a handbook for the trader wanting to exploit options to the greatest possible benefit. Generate monthly income by selling covered strangles Use call spreads to recover from a losing stock position Protect an existing stock position using put diagonals Discover the best strategies for directional market plays Option spreads are a great tool for traders who would rather be an option seller but who need to limit their risk. The Complete Book of Option Spreads and Combinations identifies those strategies that benefit from option erosion but that limit risk. If managed properly, spreads can provide both novice and experienced investors with the potential for a large return while limiting risk. Electronic trading platforms and reduced brokerage commissions have increased option spread trading, which should occupy a spot in every savvy investor's toolkit. Comprehensive and authoritative, The Complete Book of Option Spreads and Combinations provides a valuable manual and lasting reference.