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

Bergsma, Kelley; Csapi, Vivien; Diavatopoulos, Dean; Fodor, Andy

doi:10.1002/fut.22071

Cited by 10 publications

(16 citation statements)

References 71 publications

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“…In this paper we show that we are able to capture informed trading dynamics by the joint modeling of option trade duration and volume. However, future research should further concentrate on the relative classification of option informed trades across option moneyness as recent research has demonstrated that the distribution of informed trades across moneyness levels is not uniform (Bergsma et al, 2020).…”

Section: Discussionmentioning

confidence: 99%

Information and the arrival rate of option trading volume

Zhang

Verousis

Kalaitzoglou

2021

Journal of Futures Markets

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In this paper we investigate the interaction between liquidity and information in the options market and its impact on the pricing of the underlying asset. We model option trade duration and volume jointly, for the first time, as a natural measure of options' trading intensity and we associate it with differential degrees of information present in option trades. We report a highly significant association between option trading intensity with contemporaneous and future underlying volatility and returns, which is robust to the presence of other information measures, market factors, and structural forms.

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Section: Discussionmentioning

confidence: 99%

Information and the arrival rate of option trading volume

Zhang

Verousis

Kalaitzoglou

2021

Journal of Futures Markets

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“…Options are often used by traders for the purpose of speculation or hedging. There is a voluminous literature and textbook in finance discussing the use of options for speculation or hedging, such as Easley et al (1998), Hull (2006), Pan and Poteshman (2006), Roll et al (2010), Xing et al (2010), Ge et al (2016), Ryu and Yang (2018), and Bergsma et al (2020). Extant literature documents abnormal trading activity in options market around important corporate events, such as earnings announcements (Amin & Lee, 1997), M&A announcements (Augustin et al, 2019; Cao et al, 2005; Weinbaum et al, 2021), share repurchase announcements (Hao, 2016), dividend change announcements (Zhang, 2018), and unscheduled corporate announcements related to M&As, seasoned equity offerings, stock repurchases, dividend initiations and terminations (Baruch et al, 2017).…”

Section: Introductionmentioning

confidence: 99%

Speculation or hedging?—Options trading prior to FOMC announcements

Jiang

Pan

2021

Journal of Futures Markets

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This paper investigates options trading activity before Federal Open Market Committee (FOMC) announcements. We find evidence that informed traders use options to speculate on their private information for the upcoming FOMC announcements. Specifically, abnormal trading volume of call options on S&P 500 index during the preannouncement window positively predicts postannouncement index returns, and this predictability mainly comes from near‐the‐money call options. Moreover, we further break down trading volume based on the direction of trades and show that buyer‐initiated call option trading volume positively predicts postannouncement index returns. We find no evidence that investors use options to hedge postannouncement market uncertainty.

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“…This measure is monotonically increasing with both OTM call open interest and moneyness, capturing gambling demand and optimistic expectation among option traders. Our work is closely related to Bergsma et al (2020). Bergsma et al (2020) propose a dollar volume weighted average moneyness measure, aveMoney, to capture informed option trading.…”

Section: Introductionmentioning

confidence: 99%

Measuring gambling activity in options market

Chen

Gan

2021

RBF

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PurposeThis paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.Design/methodology/approachThis paper proposes a gambling activity measure by jointly considering open interest and moneyness of out-of-the-money (OTM) individual equity call options.FindingsThe new measure, CallMoney, captures excessive optimism during the dot-com bubble, the oil price bubble and the pre-GFC stock market bubble. CallMoney robustly and negatively predicts both OTM and at-the-money call option returns cross-sectionally. The option return predictability of CallMoney is stronger when stock price is further from its 52-weeks high, capital gains overhang is lower, and when information uncertainty of the underlying stock is higher. CallMoney also robustly and negatively predicts cross-sectional stock returns.Originality/valueThe gambling measure has the advantages of being economically intuitive, model-free, easy to measure. The measure performs more robustly than existing lottery measures with respect to option and stock return predictability and more reliably captures the overpricing of options and stocks. The work helps understanding the gambling related anomalies in equity option returns and stock returns.

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

Cited by 10 publications

References 71 publications

Information and the arrival rate of option trading volume

Information and the arrival rate of option trading volume

Speculation or hedging?—Options trading prior to FOMC announcements

Measuring gambling activity in options market

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