Does the early bird catch the worm? The information content of Taiwan's index option trading in the early 15-min pre-opening session

Abstract

We examine the information content of index options trading during the pre-opening session. Using data from the Taiwan market, we find that variables constructed based upon option implied volatility and option volume imbalance in the pre-opening session can predict spot index and ETF returns for up to ten minutes after the spot market opening. This finding remains robust, even after controlling for the pre-opening returns of index futures, which suggests that pre-opening trading in index options plays a critical and unique role in price discovery prior to the opening of the spot market. Such predictive ability is stronger for short-term options, near-the-money options, and for options that are away from expiration days. We also find that pre-opening options trading reflects the uncertainty transmitted from overseas markets, showing lower predictive ability on days with less definite overnight information (greater CBOE VIX). (C) 2017 Elsevier Inc. All rights reserved.