Information and the Arrival Rate of Option Trading Volume

Abstract

Prior literature recognizes that liquidity is essential in understanding the information content of option trades. In this paper, we model the duration and volume jointly, for the first time, as a natural measure of options’ trading intensity and we associate it with differential degrees of information present in option trades. We report a highly significant association between option trading intensity with contemporaneous and future underlying volatility and returns, which is distinct from the effects of option duration and option trading volume and the O/S ratio. Finally, we show that our trading intensity measure and the O/S ratio are complementary in capturing informed trading in the option market.