Download or read book Order Flow and Expected Option Returns written by Dmitriy Muravyev and published by . This book was released on 2015 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt: I show that the inventory risk faced by market-makers has a first-order effect on option prices. I introduce a simple approach that decomposes the price impact of trades into inventory risk and asymmetric information components. While both components are large for option trades, the inventory risk component is larger. Using the full panel of daily option returns, I find that option order imbalances attributable to inventory risk have five times larger impact on option prices than previously thought. Finally, I find that past order imbalances have greater predictive power than any other commonly used predictor of option returns.