Institute of Information Science, Academia Sinica

We investigate trading activities and implied volatilities of individual equity options in 2008 financial crisis. By focusing on intra-day liquidity provision and volatility discovery in options markets, prior to Lehman Brother’s bankruptcy announcement, we have 2 sets of findings. First we find that option markets demonstrated (inverted) U-shaped percentage spread (depth) consistent with higher informational uncertainty in opening and close section.  However the liquidity spikes documented by Engle and Neri (2010) no longer exists.  On 15th of September, the percentage spread in option market increases 43.377%, i.e. about one-fourth of the percentage spread increase in equity market (159.005%), suggesting option markets suffer less liquidity dry-up than equity markets from these shocks in percentage basis. Finally we show that put options, OTM and LEAPS could contribute significantly to implied volatility discovery, evident that they are not informationally redundant. Although relatively thinly traded, these contracts are very important statistically and economically for an efficient market during extreme market conditions. Our results are perhaps ironic as put, OTM and LEAPS are contracts that were not included in most previous studies.