Returns and Option Activity over the Option-Expiration Week for S&P 100 Stocks

Abstract:     
We find new empirical regularities that suggest cycles in option activity can induce reliable patterns in the weekly stock returns of the largest-cap stocks. For S&P 100 stocks, the weekly returns over option-expiration weeks (a month's third-Friday week) tend to be high, relative to: (1) the third-Friday weekly returns of other stocks with less option activity, (2) the own stock's other weekly returns, (3) the risk, based on asset-pricing alphas. For these same stocks, a month's fourth-Friday weekly returns underperform modestly. Along with related findings in recent literature, our analysis of option activity indicates delta-hedge rebalancing by market makers seems a likely contributor to the return patterns.

Number of Pages in PDF File: 47

Keywords: Option Expiration, Stock Returns, Option Delta Hedging

JEL Classification: G12, G13, G14

working papers series