Do Options Price Predictable Patterns in Future Stock Returns? Evidence from Accounting Anomalies

57 Pages Posted: 22 Apr 2015 Last revised: 25 Sep 2015

See all articles by Bryce Schonberger

Bryce Schonberger

University of Rochester - Simon Business School

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Date Written: August 1, 2015

Abstract

We examine whether option prices correct for predictable bias in stock prices associated with accounting anomalies. Evidence from put-call parity violations suggests that they do not. Rather, option prices accurately track contemporaneous stock prices. Further analysis suggests that high costs of trading options — implied volatility premiums and transaction costs — could prevent traders from exploiting these profit opportunities. However, we find some evidence of unexploited profit opportunities of significant magnitudes, even after transaction costs, for trading strategies that sell options. Our results suggest that option prices mechanically incorporate contemporaneous stock prices, and therefore reflect the exact forms of mispricing present in stock prices.

Keywords: Accounting signals, equity options, put-call parity, transaction costs

JEL Classification: G12, G14, M41

Suggested Citation

Schonberger, Bryce and Subramanyam, K.R. and Hong, Hyun A., Do Options Price Predictable Patterns in Future Stock Returns? Evidence from Accounting Anomalies (August 1, 2015). Simon Business School Working Paper No. FR 15-03. Available at SSRN: https://ssrn.com/abstract=2597179 or http://dx.doi.org/10.2139/ssrn.2597179

Bryce Schonberger (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

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