ORCID Identifier(s)

0000-0002-9638-1746

Graduation Semester and Year

2017

Language

English

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Finance

Department

Finance

First Advisor

Salil Sarkar Sarkar

Abstract

This study will take a three-prong approach to examine the role high-leveraged option trades have in determining the informational content of options market trading. First, I closely observe the structure of the volatility spread ahead of firm-level corporate earnings events to strengthen the well documented lead-lag relationship between the option and stock markets. I find that volatility spreads driven by deep, out-of-the-money options exceed the predictability of equivalent volatility spreads that are more uniform in distribution. I then explore the differential behavioral responses of leveraged trades and earnings, such the role of the disposition effect and overconfidence. I find that while options traders do suffer from the disposition effect, they also experience profit loss due to the disposition of equity traders to hold losers following negative news releases. This occurs despite signals released by options market trading suggesting poor news may be ahead on the horizon. Next, I conduct simulations of the return deviations for both positive and negative Leveraged Exchange Traded Funds (LETFs). I find that the compounding deviations for negative LETFs tend to be larger than those of their positive counterparts, but both tend to deteriorate during times of higher volatility. By consequence this implies, and I show, that compounding deviations are also higher for more volatile indices and lower for less volatile ones. Finally, I examine options markets of LETFs and the predictability of compounding errors over multi-day horizons through simulations of LETFs from 1996 to 2015. I find that option implied volatility in the S&P 500 does predict the performance of hypothesized returns of positive LETFs.

Keywords

Implied volatility, options, informed trading, volatility spread

Disciplines

Business | Finance and Financial Management | Real Estate

Comments

Degree granted by The University of Texas at Arlington

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