Assistant Professor, University of Southern California, Los Angeles. This paper is based on the fourth essay of my dissertation completed at the University of California, Berkeley. I am obliged to Mukesh Bajaj, Tim Campbell, Gregory Connor, Larry Harris, Terry Marsh, and Mark Rubinstein (dissertation advisor) for helpful comments. I am especially obliged to the referee and the editor for many helpful suggestions which improved this paper considerably.
Liquidity of the CBOE Equity Options
Article first published online: 30 APR 2012
1990 The American Finance Association
The Journal of Finance
Volume 45, Issue 4, pages 1157–1179, September 1990
How to Cite
VIJH, A. M. (1990), Liquidity of the CBOE Equity Options. The Journal of Finance, 45: 1157–1179. doi: 10.1111/j.1540-6261.1990.tb02431.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
We examine the CBOE option market depth and bid-ask spreads. Absence of price effects surrounding large option trades suggests excellent market depth. However, bid-ask spreads for the CBOE options and the NYSE stocks are nearly equal, even though an average option is equivalent to less than half a stock plus borrowing. We explain this tradeoff between market depth and bid-ask spreads on the CBOE and the NYSE by differences in market mechanisms. We also show that the adverse-selection component of the option spread, which measures the extent of information-related trading on the CBOE, is very small.