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Volatility Information Trading in the Option Market



  • JUN PAN,


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    • Ni is at the Hong Kong University of Science and Technology. Pan is at the MIT Sloan School of Management and NBER. Poteshman is at the University of Illinois at Urbana-Champaign. We thank Joe Levin, Eileen Smith, and Dick Thaler for assistance with the data used in this paper. We thank Bob Whaley and an anonymous referee for extensive and insightful comments. We also benefited from the comments of Joe Chen, Jun Liu, Neil Pearson, Josh Pollet, Rob Stambaugh (the editor), Dimitri Vayanos, Jiang Wang, Josh White, and seminar participants at the University of British Columbia, the University of Illinois at Urbana-Champaign, the University of Virginia, Vanderbilt University, and the 2006 AFA meetings. Poteshman thanks the Office for Futures and Options Research at the University of Illinois at Urbana-Champaign for financial support. We bear full responsibility for any remaining errors.


This paper investigates informed trading on stock volatility in the option market. We construct non-market maker net demand for volatility from the trading volume of individual equity options and find that this demand is informative about the future realized volatility of underlying stocks. We also find that the impact of volatility demand on option prices is positive. More importantly, the price impact increases by 40% as informational asymmetry about stock volatility intensifies in the days leading up to earnings announcements and diminishes to its normal level soon after the volatility uncertainty is resolved.

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