Option expirations and treasury bond futures prices

Abstract

ptions on financial futures are relatively new financial instruments, although 0 options on commodities have been in existence since the Nineteenth Century.The historical record of commodity options has been beset with problems, abuses and suspended operations.The prospects for commodity options remained bleak until 1981, when the Commodity Futures Trading Commission (CFTC) allowed options to be traded on organized exchanges for an initial three year period.' In view of the blemished record of commodity options trading and public policy considerations, the purpose of this pilot program was to provide a means by which the commercial usefulness of options and the impact of options on associated markets could be evaluated.Among the options granted approval under this pilot program, the market for options on Treasury bond futures has grown into the biggest market on any of the nation's 11 commodity exchanges. The growth of this market is perhaps best exemplified by a recent excerpt from the financial press (Wall Street Journal, 30 April However, the growth of these markets has also spawned questions concerning the impact of options trading on other segments of the capital markets, such as the effect of trading in such instruments on the capital formation process, the liquidity of credit and money markets and the effect on the market for the underlying assets. The purpose of this research is to investigate one facet of the gamut of issues facing the commodity options market; namely the behavior and volatility of Treasury Bond futures around the time of expiration of call options on these futures. 'See Johnson (1982a) for a chronology of the historical developments in commodity option trading. Trading in options on nonfarm futures contracts and on nonfarm physical commodities such as gold and silver was extended indefinitely by the CFTC on August 13, 1985. A similar three year pilot program for agricultural options will expire on January 25, 1987.

The Value of Trading Consolidation: Evidence from the Exercise of Warrants

“…Klemkosky (1978) finds negative abnormal returns on the underlying stock in the week before the expiration of options listed on the Chicago Board Options Exchange that is partially reversed in the subsequent week. Pope and Yadav (1992) find similar, albeit smaller, effects in the U.K., and Bhattacharya (1987) finds no evidence of abnormal price behavior of bond futures contracts either before or after the date of option expiration. Pope and Yadav (1992) find similar, albeit smaller, effects in the U.K., and Bhattacharya (1987) finds no evidence of abnormal price behavior of bond futures contracts either before or after the date of option expiration.…”

Expiration day effects: The case of Hong Kong

“…Previous studies, such as those of Bhattacharya (1987), Stoll and Whaley (1991), and Karolyi (1996), have found that expiration days are associated with abnormal trading volume, and the trading volume during last hour of expiration days can be as much as twice the normal trading volume. The results of testing the hypothesis that we will not observe a higher trading volume on the expiration day than on nonexpiration days are provided in Table VI.…”

Futures option expirations and volatility in the stock index futures market

“…Relatively little research examines the impact of option expirations on other optionable assets. Bhattacharya (1987) does examine the expiration of options on Treasury-bond futures prices. Using daily price information for October 1982 through July 1985, Bhattacharya finds no evidence of abnormal price behavior in the Treasury-bond futures market either before or after the date of the option expiration.…”