The Information Flow of Option Markets during Global Financial Crisis: Where Do Informed Traders Trade?

Using the original transaction recodes from the Taiwan index options market, this paper is to investigate the trading behaviors of different investors and to capture the information flow between options market and stock market during global financial crisis. In contrast to previous studies, after controlling for the trading volume effects of different exercise prices with the same term-to-expiration, the empirical results show that market investors prefer to trade short-horizon contracts with larger trading liquidity and tend to choose the out-of- the-money options with higher leverage. In addition, there is a significantly reciprocal effect between options market and stock market. When the options trade increases, our findings are also consistent with the pooling equilibrium hypothesis. Particularly, the difference of trades between informed traders and individual investors during global financial crisis has responded to asymmetric information problems. Therefore, this paper concludes that the options trade of foreign institutional investors is more informative, and because of informative advantages, they are probably attracted to out-of-the money options.