Does vega-neutral options trading contain information?

• Published in: Journal of empirical finance Vol. 62; pp. 294 - 314
• Main Authors: Lee, Jaeram, Ryu, Doojin, Yang, Heejin
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2021
• Subjects: Cross-market hedging; Foreign investors; Informed trading; Order imbalance; Vega-neutral options trading; Volatility risk; Order imbalance; Informed trading; Volatility risk; Cross-market hedging; Vega-neutral options trading; Foreign investors
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2021.04.003

This study suggests a novel approach for decomposing net options demands into the options order imbalances with and without volatility risk. By analyzing a high-frequency index futures and options dataset, we examine the information content of (i) the direction-motivated order imbalance induced by a single option type, which is exposed to volatility risk, and (ii) that constructed by both calls and puts, which is vega-neutral. The aggregate options order imbalance does not convey information after controlling for futures market trading. However, the intraday options order imbalance by trading without volatility risk significantly predicts spot index returns, though its longer-horizon forecasting ability is relatively weak because of a possible cross-market hedging effect. The predictive abilities of informed foreigners’ trades and out-of-the-money options trading are prominent. Our empirical results suggest that the vega-neutral options trading conveys additional information distinct from the futures order imbalance. •We decompose the net demands for options into those bearing and excluding volatility risk.•Aggregate options demand does not convey distinct information from futures market demand.•Vega-neutral options trading contains information beyond that of futures trading.•Foreign investors mainly contribute to the information content of options order imbalance.