Maturity Driven Mispricing of Options

51 Pages Posted: 29 Nov 2016 Last revised: 30 Aug 2018

Assaf Eisdorfer

University of Connecticut - Department of Finance

Ronnie Sadka

Boston College - Carroll School of Management

Alexei Zhdanov

Pennsylvania State University

Date Written: April 1, 2017

Abstract

This paper documents that options held from one expiration date to the next achieve significantly lower returns when there are four versus five weeks between expiration dates. The average return differential ranges from 12 basis points per week for delta-hedged put portfolios to 89 basis points for straddles. Evidence based on earnings announcements and price patterns close to maturity suggests that investor inattention to exact expiration date rather than underlying risk exposures or transaction costs can explain the mispricing. The results therefore demonstrate a significant behavioral bias among option traders.

Keywords: Option returns; Investor inattention

JEL Classification: G13, G14

Suggested Citation

Eisdorfer, Assaf and Sadka, Ronnie and Zhdanov, Alexei, Maturity Driven Mispricing of Options (April 1, 2017). Available at SSRN: https://ssrn.com/abstract=2876182 or http://dx.doi.org/10.2139/ssrn.2876182

Assaf Eisdorfer (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Alexei Zhdanov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

HOME PAGE: http://www.alexeizhdanov.com

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