Options Trading Costs Are Lower than You Think

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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.

Submitted October 20, 2020 at 01:33PM by Beliavsky
via https://ift.tt/31qTQ2o

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