Conference Agenda

Session
AP 07: Options (co-chaired by Optiver)
Time:
Thursday, 17/Aug/2023:
1:30pm - 3:00pm

Session Chair: Norman Seeger, VU Amsterdam
Session Chair: Artur Swiech, Optiver
Location: KC-07 (ground floor)


Presentations
ID: 1391

Demand in the Option Market and the Pricing Kernel

Caio Almeida1, Gustavo Freire2

1Princeton University; 2Erasmus School of Economics, Erasmus University Rotterdam, Netherlands, The

Discussant: Neil D. Pearson (University of Illinois at Urbana-Champaign)

We show that net demand in the S&P 500 option market is fundamental to explain empirical puzzles related to the pricing kernel. When public investors (non-market makers) are exposed to variance risk by net-selling out-of-the-money (OTM) options, the pricing kernel is U-shaped, expected option returns are low and the variance risk premium is high. Conversely, when public investors are protected against variance risk by net-buying OTM options, the pricing kernel is decreasing in market returns, expected option returns are high and the variance risk premium is low. Our findings support equilibrium models with heterogeneous agents in which options are nonredundant.

EFA2023_1391_AP 07_1_Demand in the Option Market and the Pricing Kernel.pdf


ID: 681

No Max Pain, No Max Gain: Stock Return Predictability at Options Expiration

Ilias Filippou1, Pedro Garcia-Ares2, Fernando Zapatero3

1Washington University, Saint Louis; 2ITAM, Mexico City; 3Questrom School of Business, Boston University, United States of America

Discussant: Paola Pederzoli (University of Houston)

Max Pain price is the strike price at which the total payoff of all options (calls and puts) written on a particular stock, and with the same expiration date, is the lowest. We construct a measure of (potential) Max Pain gain/loss, sort stocks according to this measure, and find that a spread portfolio that buys high Max Pain stocks and sells low Max Pain stocks generates large, positive and statistically significant returns and alphas. Our results provide strong evidence of stock return predictability at the expiration of the options. Finally, we find that these returns reverse after the options expiration week. This is all consistent with stock manipulation on the part of market participants with short positions. Our results are especially strong for relatively small and illiquid stocks.

EFA2023_681_AP 07_2_No Max Pain, No Max Gain.pdf


ID: 664

Pricing Event Risk: Evidence from Concave Implied Volatility Curves

Lykourgos Alexiou1, Amit Goyal2, Alexandros Kostakis1, Leonidas Rompolis3

1University of Liverpool; 2Swiss Finance Institute, University of Lausanne; 3Athens University of Economics and Business

Discussant: Mehrdad Samadi (Federal Reserve Board of Governors)

We document that implied volatility (IV) curves extracted from short-term equity options frequently become concave prior to the earnings announcements day (EAD), typically reflecting a bimodal risk-neutral distribution for the underlying stock price. Firms with concave IV curves exhibit significantly higher absolute stock returns on EAD and higher realized volatility after the announcement, as compared to firms with non-concave IV curves. Hence, concavity in the IV curve constitutes an ex-ante option-based signal for event risk in the underlying stock. Returns on delta-neutral straddles, delta-neutral strangles, and delta- and vega-neutral calendar straddles are all negative and significantly lower in the presence of concave IV curves, showing that investors pay a substantial premium to hedge against the gamma risk arising due to this event.

EFA2023_664_AP 07_3_Pricing Event Risk.pdf