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This study examines the directional information content realized by trades in a highly liquid options market by constructing put–call volume ratios and decoupled options‐to‐spot volume ratios. By investigating whether the specific investor type predicts underlying returns and the method used to exploit a directional information advantage, we find that foreign investment firms can leverage their directional information by executing buy trades to open new positions. Their open‐buy trades significantly predict next‐day spot returns, whereas trades initiated by domestic firms do not. This relationship becomes stronger for out‐of‐the‐money, large, and short‐horizon options trades and during the short‐sale restriction period.

This study demonstrates that the basic properties predicted by one-dimensional diffusion option pricing models are often violated, even in a highly liquid and leading options market. We analyze a high-quality intraday dataset of KOSPI 200 index options, one of the most actively traded options markets in the world, and find that option prices often do not monotonically correlate with underlying prices. We also empirically show that option prices often do not change, despite changes in underlying prices, when options are heavily traded by individual investors, who are normally noisy and uninformed. Our evidence is partially consistent with the implications of demand-based option pricing models, which predict that investor demand can significantly influence option prices in the presence of limits to arbitrage.

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This study reexamines whether option price monotonicity properties hold in a liquid market with little market friction and considers the validity of the monotonicity properties in light of option market characteristics. We confirm that option prices do not monotonically correlate with underlying spot prices and that call and put prices often increase or decrease together, indicating that the monotonicity properties are not consistent with the observed option price dynamics. The violations of monotonicity properties are associated with not only market microstructure effects, trade sizes, and option leverage but also other market characteristics such as trade direction, individual investor demand, foreign investor trading, and market volatility. Violation occurrences tend to be clustered, and their relationship with option market characteristics has not been affected by the recent market reform. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:473–498, 2017