Trading in option contracts before large price changes: A comparative study of US and UK markets

Abstract

Previous studies indicate that traders in possession of important information are more likely to transact in option contracts rather than the underlying asset. This article examines stock option trading volume before significant price changes in the underlying stock for all S&P100 and FTSE 100 constituent stocks. Our findings indicate irregular option trading volume before a significant amount of large price changes. This effect is less pronounced in the UK market.

Informational Role of Open Interest and Transaction Volume of Options: A Meta-Analytic Review

“…Empirical evidence also highlighted the numerous utilities of options variables; implied or quoted, relating to the options market. Manaster and Rendleman (1982) utilized call options as an estimator of equilibrium price; Murevyev et al (2013), Kumar (2016), Patel et al (2016), Liu et al (2017) used options implied price to measure the price discovery role; Galariotis et al (2014) examined the trading behaviour of the US and UK markets on account of large price changes. Likewise, options volume data are applied to measure the contemporaneous price impact (Schlag & Stoll, 2005) and to modify the option information aggregation method of Holowczak (Lin et al, 2018).…”