Option moneyness and price disagreements

ABSTRACT

This article investigates price disagreements between actual and options-implied futures prices by considering option moneyness. Out-of-the-money (OTM) options trading induces price disagreements more frequently than at-the-money (ATM) options trading. Examining price adjustments to eliminate disagreements, we find that the futures (options) market tends to move less (more) for OTM option disagreements than ATM option disagreements, suggesting that the price dynamics of OTM options are less informative and noisier than that of ATM options.

KEYWORDS:

• KOSPI200 futures and options
• price adjustment
• price disagreement

JEL CLASSIFICATION:

• G13
• G14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ We establish threshold levels for price disagreement considering the minimum tick size of the options market.

² All βcoefficient estimates are significant at the 1% level with Newey and West t-statistics with seven lags.

Additional information

Funding

This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government [NRF-2014S1A5B8060964].