Presence of Informed Trading In Options Markets: An Experiment Using Monte Carlo Simulation

Authors

Rafiqul Bhuyan, California State University, SacramentoFollow
Mohammad Robbani, Alabama A&M University
Yuxing Van, University of Pennsylvania

Abstract

Using Monte Carlo Simulation we show that informed trading take place in the options market. Our results indicate that at-the-money option contracts are less likely to be information based trades. Using Black-Scholes model to evaluate call and put options, we find that with positive and negative information shocks, informed investors are better off trading out-of-the-money and/or in-the-money-options. This is clear evidence that investors with inside or superior information would take advantage of options' leverage effect, Black (1975). Our analysis sheds light on the direction to revisit the models proposed by Easley et al (1998) and Chan et al (2002). We argue that, to examine the role of option volume, the out-of-the-money and/or in-the-money option volumes should be considered as well.

Volume

1

Issue

1

First Page

23

Last Page

29

DOI

10.58809/OEQS8634

Comments

For questions contact ScholarsRepository@fhsu.edu

Rights

© Fort Hays State University

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Recommended Citation

Bhuyan, Rafiqul; Robbani, Mohammad; and Van, Yuxing (2005) "Presence of Informed Trading In Options Markets: An Experiment Using Monte Carlo Simulation," Journal of Business & Leadership: Research, Practice, and Teaching (2005-2012): Vol. 1: No. 1, Article 4.
DOI: 10.58809/OEQS8634
Available at: https://scholars.fhsu.edu/jbl/vol1/iss1/4