☆ Does Option Trading Have a Pervasive Impact on Underlying Stock Prices? Sophie X. Nia, Neil D. Pearsonb, Allen M. Poteshmanc, and Joshua Whited October 2018 Abstract The question of whether and to what extent option trading impacts underlying stock prices has been a focus of interest since options began exchange-based trading in 1973. Recent research presents evidence of an informational channel through which option trading impacts stock prices by showing that option market makers’ delta hedge trades to hedge new options positions cause the information reflected in option trading to be impounded into underlying equity prices. This paper provides evidence of a non-informational channel by showing that option market maker hedge rebalancing impacts both stock return volatility and the probability of large stock price moves. JEL Classification: G12, G13, G14, G23 Keywords: Option trading, option open interest, delta-hedging, pinning, stock return volatility ☆We thank two anonymous referees and the editor Andrew Karolyi for their feedback and assistance with this paper, and thank Joe Levin, Eileen Smith, and Dick Thaler for assistance with the data. a Hong Kong Baptist University. E-mail:
[email protected]. b Department of Finance, University of Illinois at Urbana-Champaign, 1206 South Sixth Street, Champaign, Illinois, 61820. Tel.: +1 (217) 244-0490. E-mail:
[email protected]. c Department of Finance, University of Illinois at Urbana-Champaign, 1206 South Sixth Street, Champaign, Illinois, 61820. Tel.: +1 (217) 244-2239. E-mail:
[email protected]. d GMO LLC, 40 Rowes Wharf, Boston, MA 02110. Tel.: +1 (617) 356-7500. E-mail:
[email protected].