infonet-economy

This paper provides evidence that demand for equity index options has predictive power for
future volatility beyond current and lagged volatility in publicly available data. The predictive power increases prior to macroeconomic announcements and exhibits a positive relation with investor uncertainty about macroeconomic news. Straddle positions that trade on the volatility informed index option demand yield annualized Sharpe Ratios that are up to twice as large as the Sharpe Ratios on a long index investment. Sharpe Ratios increase with the amount of volatility informed trading in the options market. In times of high volatility, the demand for
straddle positions contains significantly more information and has an impact on option liquidity levels.