Exploiting Option Information in the Equity Market

Financial Analysts Journal, Forthcoming

39 Pages Posted: 8 Feb 2012  

Guido Baltussen

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Bart van der Grient

Robeco Asset Management - Quantitative Strategies

Wilma de Groot

Robeco Asset Management

Weili Zhou

Robeco Asset Management

Erik Hennink

Rabobank International, Netherlands

Date Written: December 31, 2011

Abstract

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

Baltussen, Guido and van der Grient, Bart and de Groot, Wilma and Zhou, Weili and Hennink, Erik, Exploiting Option Information in the Equity Market (December 31, 2011). Financial Analysts Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2001461

Guido Baltussen (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Bart Van der Grient

Robeco Asset Management - Quantitative Strategies ( email )

P.O. Box 973
3000 AZ Rotterdam
Netherlands

HOME PAGE: http://www.robeco.com

Wilma De Groot

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands
+31 10 224 3107 (Phone)

Weili Zhou

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands
+31-10-2242222 (Phone)

HOME PAGE: http://www.robeco.com/quant

Erik Hennink

Rabobank International, Netherlands ( email )

Utrecht 3500 HG
Netherlands

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