Investment horizon and option market activity

Da‐Hea Kim

Journal of Futures Markets, 2022, vol. 42, issue 5, 923-958

Abstract: This paper uses a unique data set of institutional investors’ equity and equity option holdings to investigate how their investment horizons are associated with option trading and its information content. Firms with more short‐term investors have more active option markets relative to stock markets. Also, they have a greater proportion of option trading volume ascribed to high‐leveraged contracts. Furthermore, both abnormal option trading before earnings announcements and informativeness of option market statistics are more pronounced when short‐term investors predominate. These findings suggest that short‐term institutions trade leveraged contracts actively to exploit information, thus effecting price discovery in option markets.

Date: 2022
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https://doi.org/10.1002/fut.22314

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