The trading efficiency on options market: Essays on stock options market

F. Black (1975) in his seminal paper "Fact and Fantasy in the use of options" mentioned a number of fantasies that widely spread in the options markets. Since Black's (1975) paper was published, there were significant changes and innovations in the options markets. The purpose of this paper is to address some of the pricing and trading aspects in the options markets.;The first paper studies the impact of option liquidity on the level of implied volatility function for equity and stock index options. Option liquidity is measured by percentage bid-ask spread, option trading volume and open interest. The study finds a significant negative effect of percentage bid-ask spread on implied volatility level, as well as positive effect of trading volume and open interest on implied volatility level. After adjusting for the underlying asset's total risk, the option percentage spread still has significant negative effect on the level of option excessive volatility. Among several firm specific variables, beta coefficient and systematic risk proportion have significant effects on the slope of excessive implied volatility function. The Fama-MacBeth regressions are used to test the hypotheses for eight moneyness categories separately. This paper explains the implied volatility function from the viewpoint of option market efficiency, and proves that the illiquidity premium documented in stock and bond market is also significant in stock options market.;In The second paper, risk-neutral Skewness derived from stock options market is used to test the information role of options price in predicting stock returns after earnings announcements. The result shows that risk-neutral skewness before earnings announcement day contains information about stock returns during earnings announcement period. Less negative options risk-neutral skewness and the positive change of skewness predict higher abnormal return after earnings announcement. In addition, it is the individual risk-neural skewness and idiosyncratic risk that play more important role in predicting the abnormal return.