Liquidity of the CBOE Equity Options

Anand M Vijh

Journal of Finance, 1990, vol. 45, issue 4, 1157-79

Abstract: The author examines 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. The author explains this trade-off between market depth and bid-ask spreads on the CBOE and the NYSE by differences in market mechanisms. The author also shows that the adverse-selection component of the option spread, which measures the extent of information-related trading on the CBOE, is very small. Copyright 1990 by American Finance Association.

Date: 1990
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