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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

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