A CHARACTERIZATION OF THE DAILY AND INTRADAY BEHAVIOR OF RETURNS ON OPTIONS

The daily and intraday behavior of returns on Chicago Board Options Ex change options is examined. Option returns contain systematic patterns even after adjusting for patterns in the means and variances of the u nderlying assets. This is consistent with the hypothesis that informed trading in options can make the order flow in the options market info rmative about the value of the underlying asset, making options nonred undant. The intraday patterns in adjusted option return variances are further consistent with a model of strategic trading by informed and d iscretionary liquidity traders.