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Volatility Information Trading in the Option Market
Author(s) -
NI SOPHIE X.,
PAN JUN,
POTESHMAN ALLEN M.
Publication year - 2008
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.1540-6261.2008.01352.x
Subject(s) - volatility smile , volatility (finance) , implied volatility , volatility swap , volatility risk premium , economics , financial economics , equity (law) , variance swap , information asymmetry , earnings , econometrics , microeconomics , finance , political science , law
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.