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How Informed Investors Take Advantage of Negative Information in Options and Stock Markets
Author(s) -
Kang Jangkoo,
Park HyoungJin
Publication year - 2014
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21651
Subject(s) - price discovery , stock (firearms) , financial economics , business , empirical evidence , ask price , stock price , economics , stock options , stock market , monetary economics , finance , futures contract , mechanical engineering , paleontology , philosophy , epistemology , horse , series (stratigraphy) , engineering , biology
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