This work was supported by a special research grant from Seoul Women's University (2014).
How Informed Investors Take Advantage of Negative Information in Options and Stock Markets
Version of Record online: 26 JAN 2014
© 2014 Wiley Periodicals, Inc.
Journal of Futures Markets
Special Issue: Special Issue from the 9th Annual Asia-Pacific Association of Derivatives Conference
Volume 34, Issue 6, pages 516–547, June 2014
How to Cite
Kang, J. and Park, H.-J. (2014), How Informed Investors Take Advantage of Negative Information in Options and Stock Markets. J. Fut. Mark., 34: 516–547. doi: 10.1002/fut.21651
- Issue online: 22 APR 2014
- Version of Record online: 26 JAN 2014
- Manuscript Accepted: 1 DEC 2013
- Manuscript Received: 1 NOV 2013
We examine whether and how investors establish positions in options when they have negative information in the U.S. markets from August 2004 to January 2009. Our empirical results show that options seem to be actively and effectively used for the exploitation of negative information. General trading volumes and bid–ask spreads of options remarkably increase like those of stocks as the short sellers increase their selling pressure. Notably, we find that the difference between a stock's traded price and its implied price from the options market reaches its peak about 2 weeks before the short sale trading activity reaches its peak. We also observe that synthetic short positions measured by this difference are preferred over OTM put positions by investors with negative information. Finally, economically significant returns based on a strategy using the difference in the traded and implied stock prices as a trading signal support our evidence. Moreover, these profits confirm the findings of the previous research which argue that options are shelters for informed investors. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 34:516–547, 2014