Informed trading in S&P index options? Evidence from the 2008 financial crisis

This study examines the presence of informed trading in S&P 500 index (SPX) options surrounding the 2008 financial crisis. Adverse selection costs are estimated using three spread decomposition models and used as proxies of informed trading. We show that adverse selection costs are economically significant and substantially increase after the onset of the crisis. For example, adverse selection costs increased by an average of $0.962 ($0.884) for call (put) options using estimates from the model of George et al. (1991). When trading with superior information, informed traders prefer options that are near-the-money, of medium maturity (30-90 days), and of low price volatility. Further analysis reveals that information asymmetry costs are positively associated with trade size and negatively associated with trading intensity.