WTI Crude Oil Options Market Prior to and During the COVID-19 Pandemic

The COVID-19 pandemic has caused turbulence in many areas of the global economy. It also contributed to an increase in volatility on the energy commodities market. This spilled over into the derivatives market, particularly the crude oil futures market. The aim of the article is to compare the costs and effectiveness of using options on WTI oil from before and after the pandemic. The analyzes took into account the value of option premiums and final results obtained by buyers of call options from March 1, 2018 to April 14, 2022. The results showed that buyers of call options during the pandemic, despite paying much higher option premiums, experienced significantly higher payouts and rates of return. They were the highest for options with the longest expiry periods of 21-30 days. Research also showed that during the pandemic, options with strike prices set at a level higher than the price of oil on the contract date had particularly high rates of return, while the highest payout values were achieved by buyers of call options with low strike prices.

The COVID-19 risk in the cross-section of equity options.

We use the implied volatility slope measures derived from US stock options to examine the impact of COVID-19 risk on the options market. The severity of COVID-19 is measured by the number of new confirmed cases. We find that equity options that are most sensitive to COVID-19 generate a more positive IV slope than less COVID-19-sensitive equity options. Moreover, this measure is more positive and significant during the lockdown period. Our findings suggest that the hedging cost of downside tail risk is more expensive during the high-uncertainty period, the time when COVID-19 is more intensive.

Representative Bias and Pairs Trade: Evidence From S&P 500 and Russell 2000 Indexes

This study tests whether pairs trade conditional on representative bias in the options and stock markets leads to abnormal returns. While previous literature on representativeness focuses on a single index, S&P 500 and Russell 2000 indexes are used to examine the extent to which representative bias arises due to a pattern of similar information shock in the three analyzed periods. The empirical results of the options market lend little support to the representativeness anomalies because Russell 2000 index, relative to S&P 500 index, does not adjust to a sequence of information shocks in the 2020 economic downturn inflicted by the coronavirus pandemic, despite the asymmetrical responsiveness to information shock over the sample period of 2004 to 2020, and during the 2008 global financial crisis. However, the empirical findings of the stock market verify, to some degree, the existence of representative bias during the sample period of 2004 to 2020. To examine whether asymmetrical representativeness in the options market or representativeness in the stock market yields abnormal returns, pairs trade is designed to exploit riskless profits via buying S&P 500 index and selling Russell 2000 index. Based on the Fama and French three-factor model, the empirical evidence is in support of market efficiency because the pairs trading strategy cannot generate positive abnormal returns in both options and stock markets.

The price of COVID-19-induced uncertainty in the options market.

This paper investigates the pricing of uncertainty associated with the COVID-19 responses for 28 countries/regions in 2020. We find that such uncertainty is priced in the equity options market. Specifically, there is a price premium for options that provide protection to hedge against price risk, variance risk, and tail risk caused by a variety of World Health Organization (WHO) announcements and the lockdown announcements from governments on COVID-19. Moreover, such options tend to be more expensive when the governments place stricter restrictions.