Discretionary Volatility Trading in Options Markets

Posted: 26 Aug 1999

See all articles by Joseph Cherian

Joseph Cherian

Asia School of Business; Johnson Graduate School of Management

Abstract

Under the assumption that the Black-Scholes option pricing formula can arise in equilibrium in a self-justifying manner (see Cherian and Jarrow [1995]), the presence of two different types of informed options traders interacting strategically will, under different market conditions, result in two forms of equilibria. In the first form, the two types of informed traders optimally separate their trades from each other by trading in different maturity options. In the second form, there will be a concentration of trading in the nearer maturity options market resulting in an increase in activity and liquidity in that market. Based on the observation that the market conditions for the latter equilibrium are consistent with empirically documented features of realized volatility, it is more likely that the latter equilibrium prevails. Finally, based on inferences from the model, some additional testable implications regarding the liquidity of call options markets under two scenarios are proposed.

JEL Classification: G13, G15

Suggested Citation

Cherian, Joseph, Discretionary Volatility Trading in Options Markets. Available at SSRN: https://ssrn.com/abstract=6167

Joseph Cherian (Contact Author)

Asia School of Business ( email )

11 Jalan Dato Onn
Kuala Lumpur, 50480
Malaysia
+6 03 2023 3244 (Phone)

HOME PAGE: http://www.josephcherian.me/

Johnson Graduate School of Management ( email )

11 E. Loop Rd. 3rd Floor
Tata Innovation Center, Cornell Tech Campus
New York, NY 10044
United States

HOME PAGE: http://www.josephcherian.me/

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
2,098
PlumX Metrics