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

See all articles by Kelley Bergsma

Kelley Bergsma

Ohio University

Vivien Csapi

University of Pécs

Dean Diavatopoulos

Seattle University

Andy Fodor

Ohio University

Date Written: December 20, 2019

Abstract

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

Bergsma, Kelley and Csapi, Vivien and Diavatopoulos, Dean and Fodor, Andy, Show Me the Money: Option Moneyness Concentration and Future Stock Returns (December 20, 2019). 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., Available at SSRN: https://ssrn.com/abstract=3507507 or http://dx.doi.org/10.2139/ssrn.3507507

Kelley Bergsma

Ohio University ( email )

1 Ohio University
Athens, OH OH 45701
United States

Vivien Csapi

University of Pécs ( email )

Pecs
Hungary

Dean Diavatopoulos

Seattle University ( email )

901 12th Avenue
Seattle, WA 98122
United States

Andy Fodor (Contact Author)

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

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