When the Options Market Disagrees
47 Pages Posted: 4 Jun 2016 Last revised: 28 Oct 2017
Date Written: October 26, 2017
We construct a new measure of investor disagreement from signed equity options trading volumes. Options disagreement negatively predicts stock returns over various horizons. The high disagreement stock portfolio underperforms the low disagreement portfolio by approximately 5% per year after standard risk adjustments. Disagreement increases around both positive and negative news releases and its predictive power for stock returns does not depend on the news content. The level of disagreement and its predictive effect for stock returns increase with short-selling costs in the stock market. Consistent with "agree to disagree" theories, disagreement also positively predicts stock trading volume and volatility.
Keywords: Options; Order Flows; Disagreement; News; Expected stock returns
JEL Classification: G12, G14
Suggested Citation: Suggested Citation