This paper focuses on the possible existence of a pricing inefficiency in stocks that have traded options. The idea is that because option writers are more sophisticated than option buyers, they may influence the underlying stock price in their desired direction. Since option writers are mainly financial institutions, they are able to open large positions in both the options and underlying stocks, and as such, have the ability and incentive to affect stock prices through transactions to benefit their short option position. Through our analysis, we find that options with a larger amount of net call-side open interest on the last trading day before expiration is negatively related to the underlying stock price change on that day. This result is consistent with the idea that the option writers have the capacity to move prices in their desired directions on the last trading day before expiration.
MSc in Finance Project-Simon Fraser University
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