Exploiting Option Information in the Equity Market
Financial Analysts Journal, Forthcoming
39 Pages Posted: 8 Feb 2012
Date Written: December 31, 2011
Public option market information contains exploitable information for equity investors for an investable universe of liquid large-cap stocks. Strategies based on several option measures predict returns and alphas on the underlying stock. Transaction costs are an important factor given the high turnover of these strategies, but significant net alphas can be obtained when using a simple transaction cost reducing approach. These findings suggest that information diffuses from the option market into the underlying stock market.
Keywords: stock selection, behavioral finance, alpha strategies, equity returns, option markets, stock markets, information spillover, asset pricing
JEL Classification: G11, G12
Suggested Citation: Suggested Citation