Option Trading Costs Are Lower Thank You Think

Option trading costs are lower thank you think

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Option Trading Costs Are Lower than You Think

87 PagesPosted: 20 Mar 2015Last revised: 7 Oct 2019

Date Written: October 4, 2019

Abstract

Conventional estimates of costs of taking liquidity in options markets are large. Nonetheless, options trading volume is high.

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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.

Option trading costs are lower thank you think

Price impact measures are also affected. These findings alter conclusions about the after-cost profitability of options trading strategies.

Option trading costs are lower thank you think

Keywords: Execution timing, trading costs, effective spread, liquidity, equity options, algorithmic trading

JEL Classification: G14, G13

Suggested Citation:Suggested Citation

Muravyev, Dmitriy and Pearson, Neil D., Option Trading Costs Are Lower than You Think (October 4, 2019).

Available at SSRN: https://ssrn.com/abstract=2580548 or http://dx.doi.org/10.2139/ssrn.2580548

Option trading costs are lower thank you think