Returns and Option Activity over the Option-Expiration Week for S&P 100 Stocks
Chris T. Stivers
University of Louisville
Old Dominion University
July 16, 2013
Journal of Banking and Finance, Vol. 37, pp. 4226-4240, November 2013.
For S&P 100 stocks, we find that the weekly returns over option-expiration (OE) 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. We suggest the following two avenues are likely partial contributors towards understanding these return patterns: (1) delta-hedge rebalancing by option market makers, with a reduction in short-stock hedge positions over the OE week, and (2) declining risk perceptions over the OE week, as measured by option-derived implied volatilities. Our findings suggest option activity can induce reliable patterns in the weekly returns of option-active large-cap stocks.
Number of Pages in PDF File: 49
Keywords: Option Expiration, Stock Returns, Option Delta Hedging
JEL Classification: G12, G13, G14
Date posted: March 24, 2010 ; Last revised: March 24, 2015
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