When the Options Market Disagrees

47 Pages Posted: 4 Jun 2016 Last revised: 28 Oct 2017

Mathieu Fournier

HEC Montreal

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Gunnar Grass

HEC Montréal

Date Written: October 26, 2017

Abstract

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

Fournier, Mathieu and Goyenko, Ruslan and Grass, Gunnar, When the Options Market Disagrees (October 26, 2017). Available at SSRN: https://ssrn.com/abstract=2788325 or http://dx.doi.org/10.2139/ssrn.2788325

Mathieu Fournier

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3 H3T 2A7
Canada

Ruslan Goyenko

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Gunnar Grass (Contact Author)

HEC Montréal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T2A7
Canada
5143401540 (Phone)

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