Price Discovery in Futures and Options Markets

Abstract

We evaluate price discovery in the natural gas futures and futures options markets using a transaction based approach. By sampling market maker prices, we allow for a distinction between buy and sell prices, both directly from the futures market, and implied from the options market. Information shares are compared between futures and options markets as well as within the options market. Given the common architecture of the two markets, we find little price information generated in the options market. Within the options market, the highly levered out-of-the-money options offer less price discovery than other options. We attribute this to the higher transactions costs of out-of-the-money options.