Informed options trading on the implied volatility surface: A cross-sectional approach |
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Authors: | Baeho Kim Da-Hea Kim Haehean Park |
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Affiliation: | 1. Korea University Business School, Seoul, Republic of Korea;2. Department of Finance, Sungkyunkwan University Business School, Seoul, Republic of Korea;3. School of Insurance, Southwestern University of Finance and Economics (SWUFE), Sichuan, China |
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Abstract: | This study investigates the cross-sectional implication of informed options trading across different strikes and maturities. We explore the term structure perspective of the one-way information transmission from options markets to stock markets by adopting well-known option-implied volatility measures to examine stock return predictability. Using equity options data for U.S. listed stocks spanning 2000–2013, we find that the shape of the long-term implied volatility curve exhibits extra predictive power for stock returns of subsequent months even after orthogonalizing the short-term components. Our findings indicate that the inter-market information asymmetry rapidly disappears before the expiration of long-term option contracts. |
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Keywords: | equity options implied volatility surface informed options trading stock return predictability |
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