Lead-lag associations between option trading and cash market volatility

Abstract

The paper examines the relationships between the OEX trading volume and interday and intraday trends in the corresponding S&P100 cash index for the 11-year interval, February 1984 to April 1995. The evidence is consistent with the notion that option trading has a stabilizing impact on cash markets. Specifically, interday and intraday volatility is found to decline following increased option trading activity. This pattern is documented for total option trading activity, speculative trading activity, and across option trading activities broken down by put and call volume. Patterns of causality from cash markets to option trading are not as evident