Anomalies, Option Volume, and Disagreement
60 Pages Posted: 28 Sep 2018 Last revised: 17 Sep 2023
Date Written: September 16, 2023
Abstract
We uncover a significant amplification of short-term anomaly returns when trading volume on stock options is high. Conversely, option volume is unrelated to long-term anomaly returns. We show that the amplification of anomaly returns stems from disagreement-based option volume, reflecting an alignment of the horizon over which biased investor expectation associated with short-term mispricing and investor disagreement is resolved. We establish a plausibly identified link between option volume-based investor disagreement and short-horizon mispricing in stocks, by leveraging the staggered XBRL adoption by firms. Moreover, stocks earn low future returns when preceded by high disagreement-based option volume and
shorting costs, supporting some disagreement models and indicates that high disagreement trades in options do not alleviate shorting constraints.
Keywords: option trading volume, investor disagreement, mispricing, horizon and anomalies
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation