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Informed Traders, Long-Dated Options, and the Cross Section of Stock Returns

55 Pages Posted: 29 Sep 2017  

Mark William Clements

Research Affiliates, LLC

Vitali Kalesnik

Research Affiliates LLC

Juhani T. Linnainmaa

USC Marshall School of Business; National Bureau of Economic Research (NBER)

Date Written: September 26, 2017

Abstract

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

Clements, Mark William and Kalesnik, Vitali and Linnainmaa, Juhani T., Informed Traders, Long-Dated Options, and the Cross Section of Stock Returns (September 26, 2017). Available at SSRN: https://ssrn.com/abstract=3043461

Mark Clements

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Vitali Kalesnik

Research Affiliates LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8717 (Phone)
949-325-8917 (Fax)

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Juhani Linnainmaa (Contact Author)

USC Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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