Title: Informed Trading in S&P 500 Weekly and Regular Options during the Pandemic Period
Author(s) : Wei-Xuan Li
This research examines the information-based trading in S&P index (SPX) and S&P weekly (SPXW) options during the COVID-19 pandemic period. An analysis of structural break is conducted, and the sample period is split into three subsample periods: the pre-pandemic, market uncertainty, and pandemic periods. The spread decomposition model by George, Kaul, and Nimalendran (1991) shows that information-based trading is more prevalent in both SPX call and put options than the SPXW counterparts. The level of information-based trading is significantly higher in SPX call options than the SPXW counterparts during the market uncertainty and pandemic periods. Informed trading in both near-the-money (NTM) SPX and SPXW put options elevates from the pre-pandemic to the market uncertainty, and to the pandemic periods. The probability of informed trading (PIN) model by Easley, Kiefer, O'Hara and Paperman (1996) confirms the findings from the spread decomposition model. However, non-parametric tests reveal that the proportion of trades initiated by informed traders is significantly higher in SPX put options than SPXW counterparts. Empirical evidence from this study implies that information-based trading is likely in long-maturity equity index options. It is suggested that options exchanges consider developing a feasible trading mechanism to deter informed trading in long-maturity equity index options.