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Differences in Options Investors' Expectations and the Cross-Section of Stock Returns

59 Pages Posted: 17 Apr 2015 Last revised: 20 May 2017

Panayiotis C. Andreou

Cyprus University of Technology

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance

Dennis Philip

Durham University Business School

Ruslan Tuneshev

Durham University Business School

Date Written: May 20, 2017

Abstract

We provide strong evidence that the dispersion of individual stock options trading volume across moneynesses (IDISP) contains valuable information about future stock returns. Stocks with high IDISP consistently underperform those with low IDISP by more than 1% per month. In line with the idea that IDISP reflects dispersion in investors’ beliefs, we find that the negative IDISP-return relationship is particularly pronounced around earnings announcements, in high sentiment periods and among stocks that exhibit relatively high short-selling impediments. Moreover, the IDISP effect is highly persistent and robustly distinct from the effects of a large array of previously documented cross-sectional return predictors.

Keywords: Dispersion of Beliefs; Disagreement in Options Market; Cross-Section of Stock Returns; Equity Options; Option Trading Volume

JEL Classification: G10; G11; G12; G14

Suggested Citation

Andreou, Panayiotis C. and Kagkadis, Anastasios and Philip, Dennis and Tuneshev, Ruslan, Differences in Options Investors' Expectations and the Cross-Section of Stock Returns (May 20, 2017). Available at SSRN: https://ssrn.com/abstract=2595104 or http://dx.doi.org/10.2139/ssrn.2595104

Panayiotis Andreou

Cyprus University of Technology ( email )

School Of Management and Economics
P.O. Box 50329
Lemesos, 3036
Cyprus

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

Anastasios Kagkadis

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Dennis Philip

Durham University Business School ( email )

Department of Economics and Finance
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Ruslan Tuneshev (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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