Show Me the Money: Option Moneyness Concentration and Future Stock Returns
Bergsma K, Csapi V, Diavatopoulos D, Fodor A. Show me the money: Option moneyness concentration and future stock returns. Journal of Futures Markets. 2020;40:761–775.
35 Pages Posted: 10 Jan 2020 Last revised: 23 Apr 2020
Date Written: December 20, 2019
Informed traders often use options that are not in-the-money due to higher potential gains for a smaller upfront cost. Thus, trading activity by option moneyness should be a gauge of informed option trading. We construct a dollar volume-weighted average moneyness measure to capture option trading activity at different moneyness levels. Stock returns increase with this measure, suggesting more trading activity in options with higher leverage predicts future stock returns. Our results hold cross-sectionally and at the portfolio level yielding a Fama-French five-factor alpha of 12% per year for all stocks and 33% per year for high implied volatility stocks.
Keywords: option moneyness, implied volatility, open interest, stock returns
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation