Options Trading Costs Are Lower than You Think

Dmitriy Muravyev, Neil D. PearsonFinance市场微观结构UTD24

The Review of Financial Studies2020-01-31Michigan State University; University of Illinois Urbana-ChampaignDOI

Citations127

Influential6

References48

Abstract Conventional estimates of the costs of taking liquidity in options markets are large. Nonetheless, options trading volume is high. We resolve this puzzle by showing that options price changes are predictable at high frequency, and many traders time executions by buying (selling) when the option fair value is close to the ask (bid). Effective spreads of traders who time executions are less than 40% of the size of conventional measures, and the overall average effective spread is one-quarter smaller than conventional estimates. Price impact measures are also affected. These findings alter conclusions about the after-cost profitability of options trading strategies.

Market liquidityProfitability indexBid priceValue (mathematics)Quarter (Canadian coin)EconomicsBusinessMonetary economicsFinancial economicsFinanceMathematicsStatistics