Hence, we provide evidence that option market activity has a pervasive impact on the price paths of underlying stocks. In particular, the impact is not limited to times very close to option expiration.
Furthermore, the effect is economically significant. The average daily absolute return of the stocks in our sample is 310 basis points and a one standard deviation shock to the gamma of the net option position variable is associated with a 37 basis point change in absolute return. Consequently, we estimate that on the order of 12% (=37/310) of the daily absolute return of optioned stocks can be accounted for by option market participants re-balancing the hedges of their option positions.
Resource:
Does Option Trading Have a Pervasive Impact on Underlying Stock Prices?
Department of Finance,
July 31, 2006
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