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

Do Call Prices and the Underlying Stock Always Move in the Same Direction? 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

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

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References (21)

Publisher
Oxford University Press
Copyright
© 2000 The Society for Financial Studies
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/13.3.549
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

The Review of Financial StudiesOxford University Press

Published: Jul 15, 2000

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