| Abstract : | The interrelationship between options market and the underlying asset’s market is highly important in the financial literature. There are several papers that examine the inefficiencies of the two markets and how these inefficiencies can become exploitable. Firstly, we use put-call parity for European options as the no-arbitrage relation. We try to decide whether deviations from put-call parity contain information about future stock returns. Our measure for the deviations from put-call parity is the volatility spread. Volatility spread is the difference in implied volatility between pairs of call and put options with the same strike price and the same expiration date. We follow the trading strategy of buying the stocks with extremely positive volatility spread, that give a positive signal to the stock market, and selling the stocks with extremely negative volatility spread, that give a negative signal to the stock market. We find no evidence that our trading strategy can be profitable. As a result, we find no evidence of whether the price and information discovery takes place in the options market or in the stock market. Our research refers to European options and stocks and to a period of 122 days (1/4/2008 – 23/9/2008). The methodology we use is based on the paper of Cremers and Weinbaum (2008).
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