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

Author

Listed:
  • Bakshi, Gurdip
  • Cao, Charles
  • Chen, Zhiwu
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. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 2000. "Do Call Prices and the Underlying Stock Always Move in the Same Direction?," The Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 549-584.
    • Handle: RePEc:oup:rfinst:v:13:y:2000:i:3:p:549-84
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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