Why Do Option Returns Change Sign from Day to Night?

96 Pages Posted: 12 Aug 2016 Last revised: 14 Nov 2018

See all articles by Dmitriy Muravyev

Dmitriy Muravyev

Michigan State University - Department of Finance

Xuechuan Ni

Boston College - Carroll School of Management

Date Written: July 1, 2016

Abstract

Average returns for S&P 500 index options are negative and large: -0.7% per day. Strikingly, when we decompose these delta-hedged option returns into intraday (open-to-close) and overnight (close-to-open) components, we find that average overnight returns are -1%, but intraday returns are actually positive, 0.3% per day. A similar return pattern holds for all maturity and moneyness categories and equity options. Most of the potential explanations struggle to explain positive intraday returns. However, our results are consistent with option prices’ failing to account for the well-known fact that stock volatility is substantially higher intraday than overnight. These findings help us better understand price formation in the options market.

Keywords: Option returns, seasonality, behavioral finance

JEL Classification: G14, G13

Suggested Citation

Muravyev, Dmitriy and Ni, Xuechuan, Why Do Option Returns Change Sign from Day to Night? (July 1, 2016). Available at SSRN: https://ssrn.com/abstract=2820264 or http://dx.doi.org/10.2139/ssrn.2820264

Dmitriy Muravyev (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

Xuechuan Ni

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

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