Maturity Driven Mispricing of Options
51 Pages Posted: 29 Nov 2016 Last revised: 30 Aug 2018
Date Written: April 1, 2017
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: Suggested Citation