Option Trading after the Opening Bell and Intraday Stock Return Predictability
Financial Management, 49(3), 769-804.
70 Pages Posted: 5 Jan 2018 Last revised: 16 Oct 2020
Date Written: September 30, 2020
Prior literature finds information is reflected in option markets before stock markets using daily and weekly trading volume, but evidence is mixed at the intraday level. Using novel intraday signed option volume data, we develop a composite option trading score (OTS) and document its stock return predictability throughout the day. We find OTS in the first 30 minutes of market open predicts stock returns during the remainder of the trading day, where predictability is greater for stocks with higher transaction costs. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings news releases. The evidence suggests option trading in the 30 minutes after the opening bell has predictive power for intraday stock returns.
Keywords: Intraday trading; options; volume; stock return predictability; transaction costs; earnings news
JEL Classification: G12, G13, G14
Suggested Citation: Suggested Citation