Top Research Papers on Options Trading

This work uses options’ underlying asset data to train the reinforcement learning model and demonstrates that the most stable algorithm for obtaining high returns is proximal policy optimization (PPO) with the protective closing strategy.

We use account-level transaction data to examine trading styles and profitability in a leading derivatives market. Approximately 66% of active retail investors predominantly hold simple, one-sided positions in only one class of options, whereas institutional investors are more likely to use complex strategies. Hypothesizing that the complexity of trading styles reflects investors’ skills, we examine the effect of options trading styles on investment performance. We find that retail investors using simple strategies lose to the rest of the market. For both retail and institutional investors, se...

In this paper we show that a Kelly trader is indifferent to trade the derivative if and only if the no-arbitrage price is uniquely given by the minimal martingale measure no-arbitrage price, thus providing a natural selection mechanism for option pricing in incomplete markets. We also show that the unique Kelly indifference price results in market equilibrium, in the sense that no Kelly trader can improve the magnitude of his instantaneous Sharpe ratio, by trading the derivative, given the actions of the other market participants.

We examine the effect of options trading on an optioned firm's investment decisions. We find that active options trading improves an optioned firm's investment efficiency, and that this effect holds under several alternative empirical specifications and identification strategies, including fixed‐effects models, different matching methods, an instrumental variable approach, a Granger causality test and a quasi‐natural experiment based on the listing decisions of the options exchanges. This relation is mediated by two factors, namely, information asymmetry and uncertainty, consistent with the no...

Abstract Trade issues lie at the heart of the two biggest constitutional challenges the UK has faced in decades: Brexit and Scottish independence. Brexit has demonstrated the economic importance of borders and led to renewed calls for Scottish independence. While there are a range of possible trading arrangements an independent Scotland could pursue, all of them involve economically significant change. In this paper, we describe Scottish trade patterns and review the range of options that a newly independent Scotland might have for its trading arrangements. We then model the relative economic ...

We introduce a semi-analytical pricing approach, which takes non-trading hours into account.

Recent empirical studies find that increased informational efficiency associated with options trading activity enhances firm value by allowing for a more efficient allocation of firm resources. In this paper, we develop and test the hypothesis that, in addition to a more efficient allocation of firm resources, options trading also enhances firm value through a financing channel, by promoting a lower cost debt structure that relies more on public debt and less on more costly bank financing. Consistent with both an information channel (where increased informational efficiency facilitates public ...

We use account-level transaction data to examine trading styles and profitability in a leading derivatives market. We find that retail investors in particular favor a consistent trading strategy: approximately 70% of retail investors predominantly hold simple one-sided positions in only one class of options, while institutional investors are more likely to use multiple strategies with a range of complexity. Accordingly, we use trading style complexity as an ex ante measure of trading skills to demonstrate its significant effect on investment performance. We find that retail investors using sim...

ABSTRACT We investigate the equilibrium properties of the implied volatility in the option market within the framework of a dynamic heterogeneous agent model. Fundamentalists and chartists are incorporated into our heterogeneous agent model, and they can change their types based on their previous performance. We show that the stability conditions of the model mainly depend on the relationship between the mean-reverted coefficients of fundamentalists and the extrapolation coefficients of chartists. The empirical results show that the fundamentalists and chartists of volatility coexist in the op...

We document a rapid increase in retail trading in options in the United States. Facilitated by payment for order flow (PFOF) from wholesalers executing retail orders, retail trading recently reached over 60% of total market volume. Nearly 90% of PFOF comes from three wholesalers. Exploiting new flags in transaction‐level data, we isolate wholesaler trades and build a novel measure of retail options trading. Our measure comoves with equity‐based retail activity proxies and drops significantly during U.S. brokerage platform outages and trading restrictions. Retail investors prefer cheaper, weekl...

Purpose In this paper, the authors examine options trading in firms that soon become rumored takeover targets. This study also examines whether measures of informed trading can predict target returns (upon rumor announcement and over the post-rumor period) and/or predict which rumors lead to bids. The authors further assess whether the informed trading they observe is more prevalent in the options market or the equity market.Design/methodology/approach This study calculates abnormal options volume using a market-model approach that accounts for different attributes of options trading. The auth...

The term “algorithmic trading of options” refers to slicing and dicing, tick setting, scheduling, and liquidity seeking of orders (which are orders in instruments that happen to be options), which are unique to options and hinge on their derivative nature.

I n a recent article in this Journal, we illustrated the effectiveness of the CRISMA (Cumulative Volume, Relathe Strength, Moving Average) complex technical trading system [Pruitt and White, 19881. That article demonstrates that the arithmetic annualized risk-adjusted abnormal returns realized from stock trading using this system range from 6.13% to 35.65%, depending on the level of transaction costs and the return generating model used. We recognize that few market traders actually purchase equity securities according to trading strategies based upon strategies similar to the CRISMA system. R...

Barrier options traded in the Australian market vary considerably in terms of the extent to which the barrier is monitored and in terms of the location of the barrier level relative to the exercise price. This paper examines the impact of these differences on prices and also on deltas and gammas. We find that it is not possible to generalize results concerning hedge parameter values to all barrier options. We find that options examined by Easton "et al". (2004) do not display discontinuity of deltas at the barrier levels and that their apparent overpricing cannot be attributed to hedging diffi...

This paper investigates the relationship between option trading behavior and option pricing patterns. We argue that greater active trading in the options market due to investor overconfidence leads to higher volatility and larger discrepancies in option pricing, which may be captured by implied volatility spread and implied volatility skewness. Using two different measures of excess option trading, we find that trading activities are correlated in different ways with volatility, volatility spread, and volatility skewness. We also find that these relationships exist both over time and cross-sec...

The literature documents that the short-selling ban during the financial crisis led to a significant deterioration of options market quality. We examine the impact of single-stock futures (SSFs) trading on options market quality during the short-selling ban period. We show that there is a substitution effect between options trading and SSFs trading during the ban period and SSFs trading fails to complement the trading of put options. Nevertheless, our results show that SSFs trading had a significant effect in narrowing the bid-ask spreads of options contracts. Moreover, compared to stocks with...

This technical note provides a brief introduction to option trading strategies. It covers pay-off diagrams and specifically introduces bull spreads, butterfly spreads and calendar spreads. It also introduces straddles, strips, and strangles.

This paper proves that the optimal exercise time for the holder of an American option depends upon the physical drift of the underlying asset and the utility of the option holder. We illustrate our results by applying them to several families of utility functions, namely the CARA, the HARA, and the expected return. While the option holder maximises his utility, the issuer gains from the difference between the price maximising exercise boundary and the exercise boundary performed by the option holder. We provide the numerical results which describe the effect of the physical drift and the risk ...

This title offers market-tested guidelines to understand the math and determine the profit potential of each option trade. Successful option trading requires that you understand and know how to use the mathematics underlying option prices. "The Mathematics of Options Trading" focuses on that math, providing you with the knowledge you need to both determine expected results of an option trade and calculate the optimum position size before committing capital. Based on never-before-published work and research, this straightforward book includes: clear-cut explanations of volatility and time to ex...

George Fontanills makes it easy for you to master online options trading by walking you through a series of hypothetical trades that demonstrate how to compute the maximum risk, maximum profit, break-evens, and exit alternatives for each strategy.

An option provides a bundle of economic characteristics, including leverage, exposure to the underlying asset, exposure to a particular dynamic trading strategy, and exposure to volatility and jumps. The wide variety of options traded on indexes and large stocks permits investors to select the particular economic characteristics of interest when buying and selling options. We group exchange-traded equity and index options into delta- and maturity-based buckets, which provide dierential exposure to these economic characteristics. We examine the determinants of volume, signed volume, open intere...

Large amount of trading has let the market become volatile, leading to the emergence of volatility instruments in the market to safeguard the risk-averse investors against uncertainties arising out of volatility in asset prices. The basic idea of this paper is to see the effect of VIX, which is a volatility index based on the index option prices; the Index Option (Nifty Option Contracts), whose underlying is an index (Nifty) comprising of many stocks; and the underlying index Nifty, which captures the behavior of the overall equity market. The combined effect of these three indices on open int...

type="main"> This study examines options’ market behavior before analysts’ initiations. We find abnormal trading activity in the options market several days prior to the release of analysts’ initiations. Informed traders recognize the content and timing of the initial recommendations. We determine that informed trading is attributed to information leakage rather than savvy investors’ stock-picking ability. We also find a significant information transmission from the options market to the underlying equity market around the event. Our results are consistent with the tipping hypothesis and confi...

Two traders were bullish on the stock market. The first translated his market opinion into a purchase of S&P 500 futures. The second bought slightly out-of-the-money call options instead. The market moved immediately lower. The futures trader began to feel heat as prices moved downward. Soon, he had to liquidate because the losses and potential losses were too great. The options trader was secure in the knowledge that no mater how low prices went, the trade would lose no more than the original premium paid up front. Prices began to rally. The futures trader had lost some confidence and did not...

Contents Preface Acknowledgements 1 Introduction 2 Conventional Options, Forwards and Greeks 2.1 Call and Put Options and Forwards 2.2 Pricing Calls and Puts 2.3 Implied Volatility 2.4 Determining the Strike of the Forward 2.5 Pricing of Stock Options Including Dividends 2.6 Pricing Options in Terms of the Forward 2.7 Put-Call Parity 2.8 Delta 2.9 Dynamic Hedging 2.10 Gamma 2.11 Vega 2.12 Theta 2.13 Higher Order Derivatives Like Vanna and Vomma 2.14 Option's Interest Rate Exposure in Terms of Financing the Delta Hedge 3 Profit on Gamma and Relation to Theta 4 Delta Cash and Gamma Cash 4.1 Exam...

The following sections are included:IntroductionTraders in Options MarketsProfit DiagramsOptions StrategiesCommon Options Price DataNaked Trades: The Basic Building BlocksHedged StrategiesSpread StrategiesEXTENSION 15.1: Collars, Ratio Spreads, Butterflies, and CondorsEXTENSION 15.2: Reinsurance Contracts and Call SpreadsCombination StrategiesSummaryCasesQuestions and Problems

Section I: Basic Concepts and Strategies. Section II: Option Price Behavior and Volatility. Section III: Trading Strategies. Section IV: Managing Positions. Section V: The Psychology of Trading.

This article studies equilibrium asset pricing when agents face nonnegative wealth constraints. In the presence of these constraints it is shown that options on the market portfolio are nonredundant securities and the economy's pricing kernel is a function of both the market portfolio and the nonredundant options. This implies that the options should be useful for explaining risky asset returns. To test the theory, a model is derived in which the expected excess return on any risky asset is linearly related (via a collection of betas) to the expected excess return on the market portfolio and t...

The literature documents that the short-selling ban during the financial crisis led to a significant deterioration of options market quality. We examine the impact of single-stock futures (SSFs) trading on options market quality during the short-selling ban period. We show that there is a substitution effect between options trading and SSFs trading during the ban period and SSFs trading fails to complement the trading of put options. Nevertheless, our results show that SSFs trading had a significant effect in narrowing the bid-ask spreads of options contracts. Moreover, compared to stocks with...

How do supply and demand from informed traders drive market prices of bitcoin options? Deribit options tick-level data supports the limits-to-arbitrage hypothesis about market maker’s supply. The main demand-side effects are that at-the-money option prices are largely driven by volatility traders and out-of-the-money options are simultaneously driven by volatility traders and those with proprietary information about the direction of future bitcoin price movements. The demand-side trading results contrast with prior studies on established options markets in the US and Asia, but we also show tha...

This Online Appendix provides additional results in support of the main analysis presented in the above-mentioned paper. This Online Appendix contains two Tables. Table OA.1 replicates the estimation that is summarized in Table 2 of the manuscript, this time including firm fixed effects. Table OA.2 replicates the estimation that is summarized in Table 3 of the manuscript, this time including firm fixed effects. All variables are defined in Appendix A of the manuscript. The paper ‘Options Trading Activity and the Efficiency of Corporate Investment’ to which this Appendix applies is available at...

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Before: OAKES, KEARSE and LEVAL, Circuit Judges.Jonathan Svetkey, Assistant District Attorney, New York City (Robert T. Johnson, District Attorney, Bronx County, Peter D. Coddington and Anthony J. Girese, Assistant District Attorneys, New York City, of counsel), for Respondents-Appellants. Mark F. Pomerantz, New York City (Warren L. Feldman, Rogers & Wells, New York City, David T. Grudberg, Jacobs, Grudberg, Belt & Dow, New Haven, CT, of counsel), for Petitioner-Appellee. This is an appeal from a judgment of the United States District Court for the Southern District of New York, Robert J. Ward...

Designed as an introduction to this popular investment medium, and updated to incorporate changes brought about by the "Big Bang" and "Black Monday", this text includes advice on purchasing and selling traded call options, and information on the various techniques involved.

This chapter discussesOption Mechanics and Trading, which focuses on the mechanics and techniques of option mechanics and trading, and the underlying indicators, which describe the activity in the options market.

This study examines how options trading plays a unique role in curbing firms’ earnings management. We find that options trading volume deters managers’ earnings manipulations, and the effect can be explained by unique characteristics of the options markets. Our results remain unchanged when using both an instrumental variable approach and difference-in-differences analyses to mitigate endogeneity concerns, and after controlling for investors’ short-selling activities. This study adds to the literature by documenting a real impact of options trading on financial reporting. Our results suggest...

Options are tools for managing risk. As financial derivatives, options make financial markets more complete. This article introduces the concept of options, pricing methods and common trading strategies, and uses the trading of AAPL as an example to show the application strategy of options in actual investment, which is a good demonstration for others to understand options trading.

This work quantifies the pervasiveness of informed trading activity in target companies’ equity options before the announcements of 1,859 U.S. takeovers between 1996 and 2012 and concludes that 25% of all takeovers hav...

We investigate the extent to which firms' cost of debt may be affected by the presence of an active options market for the stock. Our baseline results reveal a detrimental effect of options trading volume on bond yield spreads and bond credit ratings. Specifically, a one-standard-deviation increase in options trading volume from its mean is associated with a 10-basis-point increase in the bond at-issue yield spread. We discuss the potential underlying mechanisms that channel the effect and show how options appear to increase the risk of bondholders being expropriated by shareholders. In partic...

Margin trading was and still is one of the most important aspect of the retail brokerage business. Moreover, margin trading is the real-life representatives of leverage and short position in financial modeling, which is an important part of academic finance. However, most effort has been on explaining its popularity and assessing empirically its effect on the capital market rather than studying the activities itself. This paper explores a new approach of researching margin by taking advantage of the flexibility and extensive framework of option pricing and shows how it could allow for a deep a...

Nowadays there are plenty of ways how people can invest their savings in order to increase their wealth in the upcoming future and option contracts are one of the ways to achieve this. It is possible to trade option contracts by using many different strategies that can bring many opportunities for the investors. However, in order to succeed and end up with a profit, relevant steps have to be taken as well as many risks considered. The goal of this article is to create and investigate selected option trading strategies through their implementation in digital trading platform. In order to achiev...

This paper documents the evolution of block trading in the crude oil options market, following the reduction of the minimum permissible block size threshold in October 2012. Block trading, that was sparse prior to this change, currently accounts for over 30% of the trading volume in WTI crude oil options, a large portion of which involves option trading strategies. We compare the execution costs of large/block orders across trading venues before and after the October 2012 regulatory change, in order to gain a better understanding of the factors behind the recent increase in block trading. We f...

We investigate optimal trading strategies under uncertainty in a nonparametric no-arbitrage framework that is consistent with an arbitrary number of assets. We show that extreme aversion to uncertainty precludes trading, and that preference for uncertainty induces market participation. <br> In an empirical exercise using S&amp;P 500 options, we find that magnitudes of optimal portfolio positions are small when uncertainty is high, whereas risk-based models usually predict the opposite. They also strongly co-move with trading volume. Differences in beliefs modelled through differences in agents...

We investigate whether active derivatives markets stimulates or inhibits firm innovation within R&Dintense industries. This is done by estimating the relationship between the volume on the option written on the firm’s stock and established measures of firm innovation. We find the relationship to be positive and robust for a number of innovation proxies. Specifically, firms with higher option volume generate more innovation per euro invested in R&D, assuming time-invariant heterogeneity in our sample. Our baseline model suggests an increase in innovation by 24% when option trading increase by 4...

 Penelitian ini bertujuan untuk mengkaji keberadaan praktik operator binary option yang dianggap ilegal di Indonesia. Melakukan investigasi faktor yang melatarbelakangi keberadaan praktik tidak etis yang dilakukan oleh operator binary option yang menimbulkan kerugian pemegang opsi. Penelitian ini menggunakan pendekatan yuridis normatif. Hasil dari penelitian ini menjelaskan bahwa binary option bukan merupakan instrument investasi atau trading. Terdapat kelemahan regulasi dalam mengatur mengenai binary option. Belum ada sanksi hukum yang tegas bagi penyelenggara binary option. Yang dianggap ber...

While this paper does not purport to be exhaustive in identifying a wide range of alternatives, it nevertheless attempts to explore Philippine trade options in the Uruguay Round of Multilateral Trade Negotiations. It attempts to indicate some policy options in the context of the Uruguay Round. It also describes the products or markets, which have apparent importance to the Philippines in the present Round, the priorities the country can take and the new issues that will be covered in the Round. It then suggests some strategies that can be pursued by the Philippines.

Fundamental analysis and technical analysis. Traditional chart analysis. Option trading: real-life practicality. Economic policies affecting stocks trends.

This work demonstrates the ability to recognize a certain class of informed trading exists which is based on private information that cannot be efficiently discounted into stock prices using machine learning algorithms and the rich features available for option markets.

Major shifts in trade policy occurred in East Asia (especially Japan and China) following the Asian financial crisis. A phenomenon of new bilateralism and new regionalism arrangements has emerged. As a member of the ASEAN, the Philippines is now party to new and proposed plurilateral arrangements in the region such as ASEAN-China, ASEAN-Japan, ASEAN-Korea, ASEAN-India and the larger regional grouping of ASEAN10+3 (China, Japan, and Korea). At the same time, bilateral efforts are on the way with Japan engaging in arrangements with separate members of the ASEAN starting with Singapore in 2002. N...

textabstractWe use a sequential trade model to clarify two mechanisms following the introduction of an option that may lead to increased efficiency in the underlying. On the one hand, market makers learn from trades in the option market and set more accurate prices. On the other hand, the proportion of informed traders in the stock market may be altered depending on the informed traders' strategies. If insiders trade a larger fraction than uninformed traders in the stock, for example because the immediate profits in the stock are larger, spreads in the stock widen, and price errors may increas...