Dissertation
Essays on Single-Stock Futures and Options Markets
Doctor of Philosophy (PhD), Washington State University
01/2020
Handle:
https://hdl.handle.net/2376/116579
Abstract
These two essays demonstrate the important role that derivative markets play in assimilating information into financial markets. In the first essay I use the 2008 short-selling ban to examine the impact of single-stock futures (SSFs) trading on options market quality. I show that there is a substitution effect between options trading and SSFs trading during the ban period. In addition, my results show that SSFs trading had a significant effect in narrowing the bid-ask spreads of options contracts. Moreover, compared to stocks without SSFs, stocks with SSFs were less likely to violate put-call parity during the ban period. My results suggest that SSFs trading helps mitigate the negative effect of the short-selling ban on options market quality documented in the literature.
In the second essay I look at information flows through large option trades. The motivation comes from CNBC’s “Halftime Report” which regularly covers unusual option activity, i.e., those abnormally large trades, and recommend investors to follow the “smart money”. I investigate the impact of the CNBC coverage on underlying stock prices and whether investors can indeed profit by following the “smart money”. I document an immediate spike in trading volume and abnormal returns at the time of the CNBC coverage, and evidence that the unusual option trades are informative of stock prices around the coverage. However, I also document a significant reversal in underlying stock prices following the CNBC coverage. Using the same criteria advocated by the CNBC commentators, I identify unusual option activities for a large sample of stocks without CNBC coverage. I confirm that the unusual option trades significantly predict underlying stock returns, but find no evidence of reversal in underlying stock prices. My findings suggest that the CNBC coverage of unusual option activity has a destabilizing effect on underlying stock prices and investors cannot profit by simply following the CNBC reporting on the “smart money”.
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Details
- Title
- Essays on Single-Stock Futures and Options Markets
- Creators
- Cuyler Lawrence Strong
- Contributors
- George J Jiang (Advisor)David A Whidbee (Committee Member)Ronald C Mittelhammer (Committee Member)Hanjiang Zhang (Committee Member)
- Awarding Institution
- Washington State University
- Academic Unit
- Carson College of Business
- Theses and Dissertations
- Doctor of Philosophy (PhD), Washington State University
- Number of pages
- 140
- Identifiers
- 99900581411901842
- Language
- English
- Resource Type
- Dissertation