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Stealth Trading in Options Markets

Published online by Cambridge University Press:  06 April 2009

Amber Anand  and
Sugato Chakravarty
Amber Anand
Affiliation:
[email protected], University of Central Florida, College of Business, Orlando, FL 32816
Sugato Chakravarty
Affiliation:
[email protected], Purdue University, West Lafayette, IN 47906
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Abstract

We investigate how price discovery occurs in the options markets through traders' trade size choice. By employing transactions data on all options traded on a sample of 100 firms, we show that informed traders fragment their orders into small (medium) trades for low (high) volume contracts. We also find that almost 60% of the price discovery occurs in the exchange with the largest market share for a given option, where informed traders favor medium size trades. Upon examining distinct option series for a given stock, we find that at-the-money calls display the highest information share.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 1 , March 2007 , pp. 167 - 187
Copyright
Copyright © School of Business Administration, University of Washington 2007

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