Volatility Leadership Among Index Options

Equity options are an attractive trading vehicle because of their high leverage and because they also enable investors to manage volatility exposure. We use high-resolution intraday data on three types of equity securities and their options, all tied to the S&P 500 index, to analyze the volatility information embedded in options with different moneyness and maturity that are traded in three different venues. The study explores the dynamic process by which information relevant to predicting future volatility in these cointegrated markets is incorporated into their implied volatilities. Using two measures of information leadership, information shares and common factor weights, we find that the market for the SPDR ETF seems to be most efficient with regard to transmitting new information about both price and volatility. Slightly out-of-the-money put options appear to reflect innovations in volatility information more quickly than either at-the-money put or call options. We also present evidence that contracts close to maturity lose their leadership role relative to those with longer time to expiration.