In this paper, I study trading activities prior to M&A announcements pertaining to the rivals of the merging firms. I find that not only acquirers and targets experience increases in abnormal trading activities in stock and option markets, but also their rivals. The rise in option trading is...

In this paper, we examine the performance of certain short option trading strategies on the S&P500 with backtesting based on historical option price data. Some of these strategies show significant outperformance in relation to the S&P500 index. We seek to explain this outperformance by modeling...

We document that a theoretically founded, real-time, and easy-to-implement option-based measure, termed synthetic-stock difference (SSD), accurately estimates the part of stock's expected return arising from stock's transaction costs. We calculate SSD for U.S. optionable stocks. SSD can be more...

This paper investigates the pricing of single-asset autocallable barrier reverse convertibles in the Heston local-stochastic volatility (LSV) model. Despite their complexity, autocallable structured notes are the most traded equity-linked exotic derivatives. The autocallable payoff embeds an...

The studies on the behavior and impact of HFTs in terms of market quality have mainly focused on the stock market and the options market has received less attention. Options exchanges identify high-frequency/algorithmic traders as Professional customers (PCs). In this study, we use granular data...

This paper conducts a first look into the regulated Bitcoin options market in the United States. We find bitcoin options to be ten times more illiquid than stock options, as measured by bid-ask spreads. The illiquidity significantly affects bitcoin options pricing: Given that investors are on...

The increasing adoption of Digital Assets (DAs), such as Bitcoin (BTC), rises the need for accurate option pricing models. Yet, existing methodologies fail to cope with the volatile nature of the emerging DAs. Many models have been proposed to address the unorthodox market dynamics and frequent...

Astonishingly little attention has been paid in academic literature to the 2008-2009 foreign exchange (FX) options debacle in Poland, the scale of which was unheard of. It affected not only an individual organization but a significant part of economy, being an example of a situation in which...

Hedging down-and-out puts (and up-and-out calls), where the maximum payoff is reached just before a barrier is hit that would render the claim worthless afterwards, is challenging. All hedging methods potentially lead to large errors when the underlying is already close to the barrier and the...

Using a market model and principal component analysis, we investigate the existence of common effects in order imbalance in the Borsa Istanbul's option market. Accordingly, we find the presence of commonality in order imbalance for call options and an even more dominant presence in put options....

By employing the modified net buying pressure as a measure of informed option trading, this study tested whether option trading around quarterly earnings announcements is either directionally motivated and/or volatility motivated. We found evidence that is consistent with the idea that option...

This study sets out a new methodology to exemplify, through a set of risk metrics called the Greeks, impact of a bond’s structured provisions (e.g., call, put, and conversion options) on its risk characteristics and its propensity for agency conflicts. The methodology is assessed by applying...

We document a political risk premium of about 0.30% per month in the equity option market. High-political risk firms exhibit delta-hedged returns that are significantly lower than those of low-political risk firms. The effect holds both in a cross-sectional and in a time-series context. A...

We provide the first comprehensive analysis of option information for pricing the cross-section of stock returns by jointly examining extensive sets of firm and option characteristics. Using portfolio sorts and high-dimensional methods, we show that certain option measures have significant...

We analyze how informed investors trade in the options market ahead of corporate news when they receive private, but noisy, information about the timing and impact of these announcements on stock prices. We propose a framework that ranks options trading strategies (option type, maturity, and...

We examine the effects of limited investor attention on stock returns by using Google search volume index to measure investor attention. We also investigate whether national culture and market development have any role in this relationship. We find that the impact of investor attention on stock...

We analyse robust dynamic delta hedging of bitcoin options using a set of smile-implied and other smile-adjusted deltas that are either model-free, in the sense that they are the same for every scale-invariant stochastic and/or local volatility model, or they are based on simple regime-dependent...

This research focuses on the estimation of measures of rare disaster concerns from option prices. We propose a new smile construction approach to obtain the required continuum of implied volatilities from discretely sampled observations that are affected by microstructure noise. We extrapolate...

We present a general pricing approximation technique for European call option prices in a jump-diffusion model with stochastic interest rates. We consider the dynamics of the logarithm of the forward price, under the forward measure, in the class of multifactor Affine and Quadratic models...

This paper studies firms’ information withholding in a mandatory environmental disclosure regime where regulators only allow firms to withhold information regarded as a trade secret. I find evidence of withholding information for reasons other than proprietary-cost concerns, which is...

Retail investors dominate option trading in recent years. Individuals are net purchasers of options, particularly call, short-dated, and out-of-the-money options, although they tend to write long-dated puts. Retail brokerage outages are associated with reduced implied volatility overall, and the...

This paper examines the role of information from the options market in forecasting the equity premium. We provide empirical evidence that the equity premium is predictable out-of-sample using a set of CBOE strategy benchmark indices as predictors. We use a range of econometric approaches to...

We evaluate the performance of common stock trade classification algorithms including the quote, tick, Lee and Ready (1991), and Ellis, Michaely, and O’Hara (2000) rule to infer the trade direction of option trades. Using a large sample of matched intraday transactions and Open/Close data, we...

We propose a counter-cyclical initial margin model for option portfolios. Our model explores the intrinsic netting within a given portfolio of European options and outputs a constant upper bound of the maximum possible loss. This feature would allow option clearinghouses and regulators to gauge...

We find explicit formulas for the moments of the time integral of an exponential Lévy process. We consider both the cases of unconditional moments and conditional on the Lévy process level at the endpoints of the time interval. We propose a new methodology for reconstructing the unknown...

We consider a setup in which a large trader has sold a number of American-style derivatives and can have an impact on prices by trading the underlying asset for hedging purposes. The price impacts are assumed to be temporary and decay exponentially with time. Due to the impact of trading on...

We study minute-by-minute behavior of the VIX index and trading activity in the underlying S&P 500 options to understand the impact of macro and microeconomic forces on risk neutral volatility. VIX often increases with macroeconomic news, reflects the credibility of Fed monetary stimulus, and...

We investigate the use of the normalized imbalance between option volumes corresponding to positive and negative market views, as a predictor for directional price movements in the spot market. Via a nonlinear analysis, and using a decomposition of aggregated volumes into five distinct market...

We analyze a simple model of bilateral bargaining under asymmetric information where the seller of an object can not simply say no by default to a buyer who is supposed to make a take-it-or-leave-it over. Rather, he must acquire this option before the actual bargaining process begins. This...

Compound options are options for which the underlying is another option. In other words, a compound option is an option written on an option. In this paper, we present two new approaches to compound option pricing. The first approach relies on Malliavin calculus methods and the Clark-Ocone...

With the transitions to overnight benchmarks as the main benchmarks in some currencies, futures based on overnight rates are becoming more common. The most traded futures on overnight rates settle against compounded rates. The pricing of those futures requires some convexity adjustments with an...

The cross-section of options holds great promise for identifying return distributions and risk premia, but estimating dynamic option valuation models with latent state variables is challenging when using large option panels. We propose a particle MCMC framework with a novel filtering approach...

The ability of option-based measures to predict future stock returns is not a sufficient condition for the existence of incremental information in options. If options markets are informationally more efficient than the stock market, then option measures may be used to predict future actual stock...

We combine the one-dimensional Monte Carlo simulation and the semi-analytical one-dimensional heat potential method to design an efficient technique for pricing barrier options on assets with correlated stochastic volatility. Our approach to barrier options valuation utilizes two loops. First we...

We show that a structural model of firm decisions can produce very flexible implied volatility surfaces: upward and downward sloping, u-shaped. A calibrated version of the model is able to match many unconditional financial characteristics of the average option-able stock, and can help explain...

This paper presents a numerical method to price American exchange options based on jump-diffusion processes. We first derive a closed-form expression for the value of European exchangeoptions, then decompose the value function of an American exchange option into a Europeancounterpart, and an...

The implied volatilities provided by OptionMetrics in the IvyDB database suggest substantial deviations from put-call parity that do not really exist. In S&P 500 options, artificial deviations occur because OptionMetrics uses non-synchronous index and option prices and an average implied...