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Liquidity of the CBOE Equity Options
Author(s) -
VIJH ANAND M.
Publication year - 1990
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1990.tb02431.x
Subject(s) - market liquidity , bid price , equity (law) , market maker , financial economics , bid–ask spread , adverse selection , business , economics , put option , monetary economics , stock market , actuarial science , finance , paleontology , horse , political science , law , biology
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.