Call-Put Implied Volatility Spreads and Option Returns

Doran, James; Fodor, Andy; Jiang, Danling

doi:10.1093/rapstu/rat006

Cited by 29 publications

(11 citation statements)

References 41 publications

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“…5 Blau, Nguyen, and Whitby (2014) find O/S ratios have stronger predictability at weekly and monthly levels than put-call (P/C) ratios. 6 Other daily studies find option-induced stock order imbalances (Hu, 2014), put-call parity deviations (Cremers & Weinbaum, 2010;Doran, Fodor, & Jiang, 2013), option implied volatilities (An, Ang, Bali, & Cakici, 2014), and the shape of the implied volatility smirk (Xing, Zhang, & Zhao, 2010) contain predictive power for future stock returns. Gulen, and Mayhew (2004) report that option markets contribute about 17% to stock price discovery using a sample from 1988 to 1992.…”

Section: Motivationmentioning

confidence: 99%

Option trading after the opening bell and intraday stock return predictability

Bergsma

Fodor

Singal

et al. 2019

Financial Management

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Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option‐to‐stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options’ bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.

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Section: Motivationmentioning

confidence: 99%

Option trading after the opening bell and intraday stock return predictability

Bergsma

Fodor

Singal

et al. 2019

Financial Management

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“…For instance, An, Ang, Bali, and Cakici (), Bali and Hovakimian (), Diavatopoulos, Doran, and Peterson (), Kang, Kim, and Yoon (), Xing et al (), and Yan (), explore the stock return predictability of option implied volatility, volatility spreads, and volatility smirks . Cremers and Weinbaum (), DeLisle, Diavatopoulos, Fodor, and Kassa (), and Doran, Fodor, and Jiang () document how call‐put implied volatility spreads predict future stock returns. Other studies investigate how option implied skewness and kurtosis affect option and stock returns (Bakshi, Kapadia, & Madan, ; Bali, Hu, & Murray, ; Conrad, Dittmar, & Ghysels, ; Rehman & Vilkov, ; Stilger, Kostakis, & Poon, )…”

Section: Introductionmentioning

confidence: 99%

Show me the money: Option moneyness concentration and future stock returns

Bergsma

Csapi

Diavatopoulos

et al. 2019

Journal of Futures Markets

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Informed traders often use options that are not in‐the‐money due to higher potential gains for a smaller upfront cost. Thus, trading activity by option moneyness should be a gauge of informed option trading. We construct a dollar volume‐weighted average moneyness measure to capture option trading activity at different moneyness levels. Stock returns increase with this measure, suggesting more trading activity in options with higher leverage predicts future stock returns. Our results hold cross‐sectionally and at the portfolio level yielding a Fama–French five‐factor α of 12% per year for all stocks and 33% per year for high implied volatility stocks.

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“…Diavatopoulos, Doran, and Peterson () find that implied idiosyncratic volatility is a stronger predictor of future idiosyncratic volatility than idiosyncratic volatility forecasts from statistical models. Doran, Fodor, and Jiang () provide evidence that implied volatility spreads contain information about both firm fundamentals and option mispricing.…”

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confidence: 99%

Anchoring and Probability Weighting in Option Prices

DeLisle

Diavatopoulos

Fodor

et al. 2017

Journal of Futures Markets

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Cumulative prospect theory argues that the human decision‐making process tends to improperly weight unlikely events. Another behavioral phenomenon, anchoring bias, is the failure to update beliefs away from established anchor points. In this study, we find evidence that equity option market investors both anchor to prices and incorporate a probability weighting function similar to that proposed by cumulative prospect theory. The biases result in inefficient prices for put options when firms have relatively high or relatively low implied volatilities. This has implications for the cost of hedging long portfolios and long individual equity positions. © 2017 Wiley Periodicals, Inc. Jrl Fut Mark 37:614–638, 2017

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Call-Put Implied Volatility Spreads and Option Returns

Cited by 29 publications

References 41 publications

Option trading after the opening bell and intraday stock return predictability

Option trading after the opening bell and intraday stock return predictability

Show me the money: Option moneyness concentration and future stock returns

Anchoring and Probability Weighting in Option Prices

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