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Stealth Trading in Options Markets

Published online by Cambridge University Press:  06 April 2009

Amber Anand
Affiliation:
aanand@bus.ucf.edu, University of Central Florida, College of Business, Orlando, FL 32816
Sugato Chakravarty
Affiliation:
sugato@purdue.edu, Purdue University, West Lafayette, IN 47906

Abstract

We investigate how price discovery occurs in the options markets through traders' trade size choice. By employing transactions data on all options traded on a sample of 100 firms, we show that informed traders fragment their orders into small (medium) trades for low (high) volume contracts. We also find that almost 60% of the price discovery occurs in the exchange with the largest market share for a given option, where informed traders favor medium size trades. Upon examining distinct option series for a given stock, we find that at-the-money calls display the highest information share.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2007

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