Traders' strategic behavior in an index options market

Abstract

We analyze traders' strategic behavior in an index options market, examining the relationships among expected duration, frequency of trades, trade size, and time to maturity using a modified ACD model. Using intraday data at-the-money put and call options, we obtain the following results:(1) Frequency of trades contains more information about future option price volatility than does trade size. This may result from institutional or large traders who have issued naked options using the delta-neutral strategy to hedge those options. This also suggests that informed traders use their informational advantage little by little, rather than all at once. (2) Option volatility increases as the maturity date approaches, contradicting the prediction of the Black-Scholes model. (3) The duration of the previous interval has a persistent effect on expected duration of the current We are greatly indebted to Bob Anderson, Seung-Hyun Oh, the editor, and an anonymous referee for their helpful comments. We gratefully acknowledge the financial support of the Korean Association of Futures and Options.

Forecasting realized volatility of Bitcoin: The informative role of price duration

“…Following Eom and Hahn (2005), we calculate log‐price changes between all adjacent transactions and set the threshold at , where is the standard deviation of log‐price change. Thus, we exclude negative and positive log‐price changes pertaining to the central 90% of the standard normal distribution 4 .…”

“…Applying the procedure described in Section 2.1 results in selecting a price threshold δ ¼ AE0:15% for negative and positive log-price changes between successive trades. This yields a sampling ratio (sample size after thinning/sample size before thinning) of 8.11%, slightly larger than the 5.9% sampling ratio in Eom and Hahn (2005), and a number of daily price events ranging from 11 to 13,873, with an average of 826 sample points per day.…”