Informed Trading of Options, Option Expiration Risk, and Stock Return Predictability

52 Pages Posted: 22 Mar 2019

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Paul Schultz

University of Notre Dame

Stephen Szaura

McGill University - Desautels Faculty of Management

Date Written: March 5, 2019

Abstract

The percentage difference between implied stock prices from options and actual stock prices, which we term the implied price difference (‘IPD’), predicts stock returns up to ten months into the future. IPD predicts stock returns even after including a number of other option-based variables, and among both the largest stocks as well as small cap stocks. Information about future stock returns comes from long-term, not short-term options. This suggests that informed investors who do not know when their longer-term information will be impounded in prices tend to trade long-term options to avoid expiration risk.

Keywords: options implied stock prices, expiration risk, stock return predictability

JEL Classification: G14

Suggested Citation

Cremers, K. J. Martijn and Goyenko, Ruslan and Schultz, Paul and Szaura, Stephen, Informed Trading of Options, Option Expiration Risk, and Stock Return Predictability (March 5, 2019). Available at SSRN: https://ssrn.com/abstract=3347194

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Ruslan Goyenko (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Paul Schultz

University of Notre Dame ( email )

361 Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Stephen Szaura

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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