The impact of net buying pressure on VIX option prices

This paper analyzes the impact of intraday trading activity on option prices in the Volatility Index (VIX) options market. Our results show that there is a temporal relationship between net buying pressure (NBP) and changes in implied volatility of VIX options. Moreover, an increase in NBPs lowers t...

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Bibliographic Details
Published in:The journal of futures markets 2020-02, Vol.40 (2), p.209-227
Main Authors: Chuang, Yi‐Wei, Tsai, Wei‐Che, Wu, Ming‐Hung
Format: Article
Language:English
Subjects:
Arbitrage
Futures market
implied volatility of volatility
limits of arbitrage
net buying pressure
Options markets
Prices
Securities prices
Stock market indexes
Trading
Volatility
Volatility Index options
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Summary:This paper analyzes the impact of intraday trading activity on option prices in the Volatility Index (VIX) options market. Our results show that there is a temporal relationship between net buying pressure (NBP) and changes in implied volatility of VIX options. Moreover, an increase in NBPs lowers the next‐day delta‐hedged option returns. Using several measures proxying for limits to arbitrage, the average levels of the implied volatility curve rise when limits to arbitrage are severe. A trading strategy in the VIX futures market constructed by using the NBP generates an average annualized return of 10.09%.
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.22060