Do Call Prices and the Underlying Stock Always Move in the Same Direction?

Gurdip Bakshi; Charles Cao; Zhiwu Chen

doi:10.1093/rfs/13.3.549

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Do Call Prices and the Underlying Stock Always Move in the Same Direction?

Gurdip Bakshi¹; Charles Cao²; Zhiwu Chen³

¹ University of Maryland, College Park · ² Pennsylvania State University · ³ Yale University

Review of Financial Studies 2000

This article empirically analyzes some properties shared by all one-dimensional diffusion option models. Using S&P 500 options, we find that sampled intraday (or interday) call (put) prices often go down (up) even as the underlying price goes up, and call and put prices often increase, or decrease, together. Our results are valid after controlling for time decay and market microstructure effects. Therefore one-dimensional diffusion option models cannot be completely consistent with observed option price dynamics; options are not redundant securities, nor ideal hedging instruments—puts and the underlying asset prices may go down together.

DOI: 10.1093/rfs/13.3.549
Volume: 13 (3)
Pages: 549-584
Language: en
Export: BibTeX
Sources: openalex crossref