Informed Traders, Long-Dated Options, and the Cross Section of Stock Returns
55 Pages Posted: 29 Sep 2017
Date Written: September 26, 2017
Option prices predict the cross section of equity returns. We show that, unconditionally, the prices of long-dated options contain all the information relevant for predicting returns. Information, however, shifts towards short-dated options when an earnings announcement is imminent and when options are cheap to trade. The difference between short- and long-dated options also predicts the timing of merger announcements. Our results are consistent with option prices reflecting the actions of informed traders, and with these traders optimally choosing option maturities to maximize the value of their information.
Keywords: Option Prices, Cross-Section, Equity Returns, Options
JEL Classification: G10
Suggested Citation: Suggested Citation