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

Posted: 24 Mar 2010 Last revised: 11 Oct 2016

Chris T. Stivers

University of Louisville

Licheng Sun

Old Dominion University

Date Written: July 16, 2013

Abstract

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.

Keywords: Option Expiration, Stock Returns, Option Delta Hedging

JEL Classification: G12, G13, G14

Suggested Citation

Stivers, Chris T. and Sun, Licheng, Returns and Option Activity over the Option-Expiration Week for S&P 100 Stocks (July 16, 2013). Journal of Banking and Finance, Vol. 37, pp. 4226-4240, November 2013.. Available at SSRN: https://ssrn.com/abstract=1571786 or http://dx.doi.org/10.2139/ssrn.1571786

Chris T. Stivers

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

Licheng Sun (Contact Author)

Old Dominion University ( email )

Strome College of Business
Department of Finance
Norfolk, VA 23529-0222
United States

Paper statistics

Abstract Views
2,813