Optionable Stocks and Mutual Fund Performance

Abstract

We examine whether stock-level options information drives mutual fund performance. Our paper is motivated by existing studies indicating that options prices or implied volatilities predict stock returns. We find that stock-implied volatility innovations forecast mutual fund performance. Specifically, mutual funds investing in fewer optionable stocks or optionable stocks with favorable information outperform other funds. In addition, mutual fund managers overall do not trade on past options information. However, well-performing fund managers use that information to decrease their holdings in poorly-performing stocks. Moreover, well-performing mutual funds containing strong options information tend to increase their holdings in optionable stocks in subsequent periods.

Keywords: implied volatility; mutual fund; optionable stock; predictability; performance

JEL Classification: G11; G13