Option Return Predictability

60 Pages Posted: 6 Dec 2015 Last revised: 14 Jan 2018

See all articles by Jie Cao

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Bing Han

University of Toronto, Rotman School of Management

Qing Tong

School of Business, Renmin University of China

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: April 5, 2017

Abstract

The cross-section of delta-hedged equity option returns can be predicted by a variety of underlying stock characteristics and firm fundamentals including idiosyncratic volatility, past stock returns, profitability, cash holding, new share issuance, and dispersion of analyst forecasts, although they do not significantly predict stock returns in our sample. We document new option portfolio strategies that are profitable even after transaction costs. These profits are robust and cannot be explained by standard risk factors. The systematic patterns in the relative valuation of options and the underlying stocks we uncover have important implications for option pricing models and option market efficiency.

Keywords: Equity option returns; delta-neutral call writing; predictability; stock characteristics

JEL Classification: G02, G12, G13

Suggested Citation

Cao, Jie and Han, Bing and Tong, Qing and Zhan, Xintong, Option Return Predictability (April 5, 2017). Rotman School of Management Working Paper No. 2698267; 27th Annual Conference on Financial Economics and Accounting Paper; Rotman School of Management Working Paper No. 2698267. Available at SSRN: https://ssrn.com/abstract=2698267 or http://dx.doi.org/10.2139/ssrn.2698267

Jie Cao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, NT
Hong Kong
(852) 3943 7757 (Phone)
(852) 2603 6586 (Fax)

HOME PAGE: http://sites.google.com/site/jiejaycao

Bing Han (Contact Author)

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

Qing Tong

School of Business, Renmin University of China ( email )

Beijing
China

Xintong Zhan

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, NT
Hong Kong

HOME PAGE: http://sites.google.com/view/xintongzhan

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