The Journal of Finance

The Behavior of Option Price Around Large Block Transactions in the Underlying Security

Published: 07/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb03998.x

RAMAN KUMAR, ATULYA SARIN, KULDEEP SHASTRI

This paper investigates the behavior of stock and option prices around block trades in stocks. The results indicate that for both up tick and downtick block trades the stock prices adjust within a fifteen minute period after the block trade. Moreover, for uptick blocks there is no evidence of any stock price reaction before the block trade. However, the adjustment of stock price for downtick blocks begins about fifteen minutes before the block trade. We also find that option price behavior differs considerably from stock price behavior. Specifically, our results suggest that options exhibit abnormal price behavior starting thirty minutes before the block and ending one hour after the block. The pattern is more pronounced for downtick blocks and for put options. We interpret this abnormal price behavior of options before the block trade as consistent with intermarket frontrunning.

The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.285595

Raman Kumar, Atulya Sarin, Kuldeep Shastri

We find that option listings are associated with a decrease in the variance of the pricing error, a decrease in the adverse selection component of the spread, and an increase in the relative weight placed by the specialist on public information in revising prices for the underlying stocks. We also find that there is a decrease in the spread and increases in quoted depth, trading volume, trading frequency, and transaction size after option listings. Overall, our results suggest that option listings improve the market quality of the underlying stocks.

The Allocation of Informed Trading Across Related Markets: An Analysis of the Impact of Changes in Equity‐Option Margin Requirements

Published: 12/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05191.x

STEWART MAYHEW, ATULYA SARIN, KULDEEP SHASTRI

We examine the impact of changes in equity‐option margin requirements on the liquidity of options and underlying stock markets. We find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, option spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks, but option spreads increased. Overall, our results indicate that uninformed traders are more sensitive to the margin dimension of trading costs.

Over‐the‐Counter Option Market Dividend Protection and “Biases” in the Black‐Scholes Model: A Note

Published: 09/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02295.x

ROBERT GESKE, RICHARD ROLL, KULDEEP SHASTRI

Most options are traded over‐the‐counter (OTC) and are dividend “protected;” the exercise price decreases on the ex date by an amount equal to the dividend. This protection completely inhibits the early exercise of American call options. Nevertheless, OTC‐protected options have market values which differ systematically from Black‐Scholes values for European options on non‐dividend paying stocks. The pricing difference is related to both the variance of the underlying stock return and to time until expiration of the option, but it is quite small in dollar amount.