Download this Paper Open PDF in Browser

Maturity Driven Mispricing of Options

51 Pages Posted: 29 Nov 2016 Last revised: 1 Dec 2017

Assaf Eisdorfer

University of Connecticut - Department of Finance

Ronnie Sadka

Boston College - Carroll School of Management

Alexei Zhdanov

Pennsylvania State University

Date Written: November 1, 2017

Abstract

Options on US equities typically expire on the third Friday of each month, implying that either four or five weeks elapse between two consecutive expiration dates. We find that options that are held from one expiration date to the next achieve significantly lower returns when there are four weeks between expiration dates. The average difference in returns ranges from 0.12% per week for delta-hedged put portfolios to 0.89% for straddles. We find consistent results from an alternative price-based measure of mispricing. We perform multiple tests to examine the risk of our option portfolios and do not find any underlying risk patterns that can potentially explain our results. We therefore argue that mispricing that we identify is due to investor inattention to the exact expiration date, and provide further supporting evidence based on earnings announcements and price patterns closer to maturity. Our results survive a series of robustness tests and are unlikely to be driven by transaction costs. Overall, our evidence points to a potential strong 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 (November 1, 2017). Available at SSRN: https://ssrn.com/abstract=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

Paper statistics

Downloads
168
Rank
153,013
Abstract Views
753