The impact of net buying pressure on index options prices

Abstract

This study examines whether the demand for options, as measured by the net buying pressure of index options, explains the implied volatility structure created by options prices. We decompose the buying pressure into the direction‐motivated (i.e., delta‐informed) and the volatility‐motivated (i.e., vega‐informed) demand for options. After controlling for options traders' hedging demand, we find that both delta‐ and vega‐informed trading play significant roles in explaining changes in implied volatility. Foreign institutions are more directionally informed in index options trading than their domestic counterparts are. Domestic investors effectively implement volatility trading using put options.

Informed options trading around holidays

“…We first find that the information content appears to be stronger for foreign investors' trades in general, whereas the information content of domestic investors' trades is weaker and relatively short‐lived (Ryu & Yang, 2018). This finding confirms the traditional perspectives about experienced and informed foreign institutional traders (Ahn et al, 2008; Sim et al, 2016) and noisy domestic individual traders (Ryu, 2013b; Ryu et al, 2021; Yang, Lee, et al, 2018). The informational superiority of foreign traders is largely due to their ability to accurately process market‐wide information (Lee & Ryu, 2019b).…”

Net Buying Pressure and the Information in Bitcoin Option Trades

“…Further extending the net buying pressure metrics to distinguish between volatility-informed and directional-informed learning hypotheses, Chen and Wang (2017) conclude that both directional and volatility motivated demand drive implied volatility changes in the TAIEX options market. This result is supported for the KOSPI 200 market by Ryu et al (2021) We contribute to this literature in several respects. First, previous studies focus on established and regulated option markets, where sophisticated traders generally lead the market (Lakonishok et al, 2007).…”

“…The methodology proposed by Kang and Park (2008) can only assess which is the dominating learning hypothesis. The model proposed by Chen and Wang (2017) and later employed by Ryu et al (2021) allows one to distinguish between the two types of learning hypotheses by running regressions of the form:…”

“…For the other measures, we aggregate them using formulae (2)-( 4). The previous literature uses different time intervals for aggregation: daily frequency in Bollen and Whaley (2004), five-minute in Kang and Park (2008) and Chen and Wang (2017) and 1-minute in Ryu et al (2021).…”

Sentiment‐dependent impact of funding liquidity shocks on futures market liquidity

“…First, the futures market traders in our sample data are identified and categorized into three major types: domestic individuals, domestic institutions, and foreigners. Domestic individuals denote the retail investors and are recognized to be noisy and less sophisticated, whereas domestic institutions include financial institutions (e.g., brokerage firms and banks) and have better information than local individuals (e.g., Ryu et al, 2021a;Webb et al, 2016). Foreigners are mostly institutional and the most informed in this index futures market (Ryu, 2015b;.…”