Net buying pressure, volatility smile, and abnormal profit of Hang Seng Index options

Kam C. Chan, Louis T. W. Cheng and Peter P. Lung

Journal of Futures Markets, 2004, vol. 24, issue 12, 1165-1194

Abstract: We use the net buying pressure hypothesis of N. P. B. Bollen and R. Whaley (2004) to examine the implied volatilities, options premiums, and options trading profits at various time‐intervals across five different moneyness categories of Hong Kong Hang Seng Index (HSI) options. The results show that the hypothesis can well describe the newly developed Hong Kong index options markets. The abnormal trading profits by selling out‐of‐the‐money puts with delta hedge are statistically and economically significant across all options maturities. The findings are robust with or without outlier adjustment. Moreover, we provide two insights about the hypothesis. First, net buying pressure is attributed to hedging activities. Second, the net buying pressure on calls is much weaker than that on put options. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1165–1194, 2004

Date: 2004
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