Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?

This paper examines the relation between net buying pressure and the shape of the implied volatility function (IVF) for index and individual stock options. We find that changes in implied volatility are directly related to net buying pressure from public order flow. We also find that changes in implied volatility of S&P 500 options are most strongly affected by buying pressure for index puts, while changes in implied volatility of stock options are dominated by call option demand. Simulated delta‐neutral option‐writing trading strategies generate abnormal returns that match the deviations of the IVFs above realized historical return volatilities.     

Evidence on the arbitrage efficiency of SPI index futures and options markets

This paper is concerned with arbitrage opportunities in the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. Tick-by-tick transaction price data are employed so that the futures contracts, the call futures options and the put futures options can be matched within a one-minute interval. This paper also takes into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. A thorough ex post analysis is first carried out. The results reveal a significant number of violations of the PCFP in the sample. Ex ante tests are then conducted whereby ex post profitable arbitrage strategies, signified by the matched trios of futures, put and call contracts, are executed with lags up to 3 min. The ex ante results are similar to the ex post results. However, further analysis reveals that the exploitability of the identified arbitrage opportunities is very limited due to the small trading volumes of the futures and options contracts. Thus, we conclude that there is no strong evidence against the arbitrage efficiency between the SPI index futures and options markets in Australia.      

Sequential information arrival in the Finnish stock index derivatives markets

This paper investigates the hypothesis of sequential information arrival in the Finnish stock index futures and options markets. With no short selling restrictions in the derivatives markets, no causality relationships between returns and trading volume are observed. However, by using the so-called call-put signal, based on call and put volumes, causality between returns and volume is found supporting the hypothesis of sequential information arrival. In addition, it is discovered that the increased volume in stock index options relative to index futures has significantly increased their importance in the intermarket price discovery process.     

Options on the Spot and Options on Futures

This paper analyzes and compares the valuation of two types of options that relate to the same asset: options on the asset itself and options on the futures on the asset. The early exercise privilege plays a central role in explaining the differences between the values of the two options. It is shown that in the case of a cash instrument that does not make interim payments, such as gold, the value of a call option on the spot is smaller than the call option on the futures contract; the opposite is true for put options. The early exercise boundaries, which characterize when it pays to exercise, are also compared and analyzed.     

The Pricing of Futures and Options Contracts on the Value Line Index

This paper considers the problems peculiar to the Value Line Index, because of its use of geometric averaging, as regards the pricing of options and futures on that index. The Value Line Composite Index (VLCI) is an equally weighted geometric average index of nearly 1700 stocks. The VLCI futures market has existed since 1982 while the VLCI options market was established in 1985. This paper provides valuation formulas and analyzes the economic properties of these contracts. Because of the geometric averaging in the VLCI, its contingent claims have special properties. For example, the futures price may fall short of the spot price and the value of a VLCI call option may decline when the volatility of the index is increased. VLCI futures are shown to provide a direct means for duplicating an equally weighted portfolio of the underlying stocks.     

Futures and futures options with basis risk: theoretical and empirical perspectives

Under a no-arbitrage assumption, the futures price converges to the spot price at the maturity of the futures contract, where the basis equals zero. Assuming that the basis process follows a modified Brownian bridge process with a zero basis at maturity, we derive the closed-form solutions of futures and futures options with the basis risk under the stochastic interest rate. We make a comparison of the Black model under a stochastic interest rate and our model in an empirical test using the daily data of S&P 500 futures call options. The overall mean errors in terms of index points and percentage are ?4.771 and ?27.83%, respectively, for the Black model and 0.757 and 1.30%, respectively, for our model. This evidence supports the occurrence of basis risk in S&P 500 futures call options.     

The volatility of temperature and pricing of weather derivatives

We propose an Ornstein–Uhlenbeck process with seasonal volatility to model the time dynamics of daily average temperatures. The model is fitted to approximately 45 years of daily observations recorded in Stockholm, one of the European cities for which there is a trade in weather futures and options on the Chicago Mercantile Exchange. Explicit pricing dynamics for futures contracts written on the number of heating/cooling degree-days (so-called HDD/CDD futures) and the cumulative average daily temperature (so-called CAT futures) are calculated, along with a discussion on how to evaluate call and put options with these futures as underlying.     

Business Cycles and Net Buying Pressure in the S&P 500 Futures Options

We analyse the cyclical behaviour and intraday pattern of net buying pressure in the S&P 500 futures options market. The results suggest that the net buying pressure of puts is counter‐cyclical and is more intense during contraction periods. The trading profits for selling put options during contraction periods thus far exceed those during expansion periods. Net buying pressure also exhibits an intraday pattern. Trading profits in the early trading sessions are higher than those for the rest of the day. In addition, we show that hourly‐basis hedging yields smaller profits than daily‐basis hedging, which suggests that the trading profits based on daily‐basis hedging may contain a risk premium associated with discretely rebalanced ‘risk‐free’ option portfolios.     

Pricing U.S. Dollar Index Futures Options: An Empirical Investigation

This paper develops a pricing model and empirically tests the pricing efficiency of options on the U.S. Dollar Index (USDX) futures contract. Empirical tests of the model indicate that the market consistently overprices these options relative to the derived model. This overpricing is more pronounced for out‐of‐the‐money options than for in‐the‐money options and more pronounced for put options than for call options. To validate the above results, delta neutral portfolios are created for one‐ and two‐day holding periods and consistently generate positive arbitrage profits, indicating that on average the market overprices the options on the USDX futures contracts.     

Are Options on Index Futures Profitable for Risk‐Averse Investors? Empirical Evidence

American options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2009) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In out‐of‐sample tests of stochastic dominance, the writing of options that violate the upper bound increases the expected utility of any risk‐averse investor holding the market and cash, net of transaction costs and bid‐ask spreads. The results are economically significant and robust.     

Efficient Analytic Approximation of American Option Values

This paper provides simple, analytic approximations for pricing exchange-traded American call and put options written on commodities and commodity futures contracts. These approximations are accurate and considerably more computationally efficient than finite-difference, binomial, or compound-option pricing methods.     

THE PROPOSED INTRODUCTION OF FUTURES‐STYLE MARGINING IN THE UNITED STATES: AN AUSTRALIAN COMPARISON

We extend the quadratic approximation method to examine American‐style options traded using futures‐style margining and show that an early exercise premium can exist when the cost of carry is negative. Empirical results based on a reduced form of the model using futures‐style call options traded on the Australian All Ordinaries Share Price Index are consistent with previous research: call option early exercise premiums are economically zero. Full option prices are examined by comparing observed futures‐style with theoretical stock‐style values. We find futures‐style values exceed stock‐style values and argue that the increase results from improvements in liquidity. The findings are particularly relevant given the pending decision at the Commodity Futures Trading Commission to introduce a futures‐style system in the United States. JEL classification: G13, C13     

An Equilibrium Model of Catastrophe Insurance Futures and Spreads

This article presents a valuation model of futures contracts and derivatives on such contracts, when the underlying delivery value is an insurance index, which follows a stochastic process containing jumps of random claim sizes at random time points of accident occurrence. Applications are made on insurance futures and spreads, a relatively new class of instruments for risk management launched by the Chicago Board of Trade in 1993, anticipated to start in Europe and perhaps also in other parts of the world in the future. The article treats the problem of pricing catastrophe risk, which is priced in the model and not treated as unsystematic risk. Several closed pricing formulas are derived, both for futures contracts and for futures derivatives, such as caps, call options, and spreads. The framework is that of partial equilibrium theory under uncertainty.     

Asymmetric Volatility and Trading Activity in Index Futures Options

We examine the impact of option trading activity on implied volatility changes to returns in the index futures option market. Controlling for option moneyness, delta‐to‐option‐premium ratio, and liquidity, we find that net buying pressure, profit‐maximization behavior, and liquidity are interrelated and affect asymmetric responses of implied volatilities to returns. Implied volatilities of options with more liquidity, a higher exercise price, and a higher delta‐to‐option‐premium ratio have the most profound asymmetric response.     

Co-movements of index options and futures quotes

We report evidence that the co-movements of index options and index futures quotes differ sharply from perfect correlation in periods with option trades. In half-hour intervals with (without) option trades 25% (12%) of call option quote changes have either the opposite sign or are larger in magnitude than the corresponding index futures quote changes. We calibrate a stochastic volatility model that allows for trade and no-trade periods using real data and simulate the joint co-movements of index quotes and option quotes in this model. We show that for trade intervals the observed co-movements differ from the benchmark case established by our simulations approximately three times too often. We provide empirical evidence that market microstructure effects – specifically, stale quotes and aggressive quotes – explain the majority of the deviations from the benchmark. Our findings are relevant for techniques that use estimates of local co-movements as inputs to price or hedge options.     

An Intraweek Seasonality in the Implied Volatilities of Individual and Index Options

This paper studies intraweek seasonalities in the implied volatilities of options on stock market indices. Oneway analysis of variance isolates the daily behavior of implied volatilities. The differential between call implied volatility and put implied volatility tends to drop on Friday and rise on Monday. Relying on a synthetic futures contract created from options, an explanatory model is proposed. The model complements previous research on the difference between the intraweek behavior of stock market indices and that of derivative instruments based on the indices.     

论巨灾期货及其市场演进

巨灾期货是一种以巨灾损失相关指数为标的物的期货合约.从1992年ISO指数巨灾期货的兴起,再到1995年被PCS巨灾指数期权的所取代,以及后来2007年CME飓风期货的最新推出可以看出一种巨灾期货的市场发展是一个不断尝试,逐步完善的过程.其市场演进呈现出四个趋势:标的指数的被人为操纵可能性降低、更新速度加快、道德风险与信息不对称问题减少、基差风险降低.     

Changes of numeraire for pricing futures, forwards, and options

A change of numeraire argument is used to derive a general optionparity, or equivalence, result relating American call and putprices, and to obtain new expressions for futures and forwardprices. The general parity result unifies and extends a numberof existing results. The new futures and forward pricing formulasare often simpler to compute in multifactor models than existingalternatives. We also extend previous work by deriving a generalformula relating exchange options to ordinary call options.A number of applications to diffusion models, including stochasticvolatility, stochastic interest rate, and stochastic dividendrate models, and jump-diffusion models are examined.     

Implied volatilities,stochastic interest rates,and currency futures options valuation: an empirical investigation

Different models of pricing currency call and put options on futures are empirically tested. Option prices are determined using different models and compared to actual market prices. Option prices are determined using historical as well as implied volatility. The different models tested include both constant and stochastic interest rate models. To determine if the model prices are different from the market prices, regression analysis and paired t-tests are performed. To see which model misprices the least, root mean square errors are determined. It is found that better results are obtained when implied volatility is used. Stochastic interest rate models perform better than constant interest rate models.     

Convertible Debt Issuance and Market Completeness

Recent empirical evidence on option listings supports the notion that equity options help to span the market. This paper investigates the role of convertible debt in market completion. To the extent that the warrant portion of convertible instruments is similar to a call option, the securities can provide payoffs in states of nature that were previously unspanned. Stockholders of firms without listed options or pre-existing warrant-related securities suffer less severe wealth declines around convertible offerings than do owners of firms with contingent claims on their stock. The results suggest that, particularly before the rise of options on index futures, convertible debt played a market-spanning role similar to that of equity options.