Information content of options trading volume for future volatility: Evidence from the Taiwan options market

Abstract

This study follows the approach of Ni, Pan and Poteshman (2008)-based upon the vega-weighted net demand for volatility-to determine whether volatility information exists within the Taiwan options market. Our empirical results show that foreign institutional investors possess the strongest and most direct volatility information, which is realized by the delta-neutral options/futures trades. In addition, a few individual investors (less than 1% of individuals' trades) might be informed and realize their volatility information using the strangle strategy. Surprisingly, we find no evidence to support the predictive ability of the volatility demand from straddle trades, despite the widespread acknowledgement that such trades are sensitive to volatility. JEL classification: G14

Deviations from Put–Call Parity and Volatility Prediction: Evidence from the Taiwan Index Option Market

“…However, in practice, volatility trading is popular and options are uniquely suited to investors with private volatility information (Back, ). Despite the evidence for the presence of informed volatility trading in the option market (Chang, Hsieh, & Wang, ; Ni, Pan, & Poteshman, ), much less is known about whether deviations from PCP contain information about future volatility.…”

“…First, volatility information trading is present in the TXO market. For example, Chang et al () show that foreign institutional investors and a few individual investors trade on private volatility information in the TXO market.…”

“…Investors must exploit their volatility information directly in the option market. In the TXO market, volatility trades constructed on an option/futures combination are favored by informed volatility investors (Chang et al, ). Thus, as positive (negative) volatility information is realized by buying (selling) a call or put option and hedging by the index futures, the option trades by informed volatility investors may widen the relative position of call and put prices, subsequently leading to a widened volatility spread.…”

Do investors use options and futures to trade on different types of information? Evidence from an aggregate stock index

“…| 187 hypothesis has been obtained by Seasholes (2000) and Froot et al (2001), and Chang et al (2009Chang et al ( , 2010. Our data present us the opportunity to test these competing hypotheses in the context of the KOSPI 200 index.…”

“…Among these studies are Chang et al (2010) who study whether options trading in the Taiwanese options market contains information about future volatilities. Among these studies are Chang et al (2010) who study whether options trading in the Taiwanese options market contains information about future volatilities.…”