Decomposing informed trading in equity options
Asencio, Felipe Bernales, Alejandro González, Daniel Holowczak, Richard
Asencio, Felipe
Bernales, Alejandro
González, Daniel
Holowczak, Richard
Publication Type
Journal article with impact factor
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Publication Year
2026-01
Journal
Journal of Econometrics
Book
Publication Volume
253
Publication Issue
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Abstract
We develop a multi-asset model to decompose informed trading into the components concerning the underlying stock-value and the volatility in equity options. We isolate the stock-value and volatility components by characterizing their distinct intraday price responses in contracts with different option deltas and vegas, respectively. The stock-value (volatility) component represents on average 41 % (19 %) of the option spread, which remains substantial under various statistical validity analyses and robustness checks. In daily empirical applications, we also show that volatility-informed trading anticipates a 'Volmageddon' high-volatility event, and straddle trades are positively associated with volatility-informed trading.
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Keywords
Asymmetric Information, Volatility Information, Underlying Stock-Value Information, Equity Option Markets, Option Order Flow