Unusual Option Activity: Is it Smart to Follow ‘Smart Money’?
74 Pages Posted: 29 Jun 2020 Last revised: 30 Aug 2021
Date Written: August 30, 2021
CNBC’s “Fast Money” regularly covers unusual option activity and refers to it as “smart money”. We investigate the impact of the CNBC coverage on underlying stock prices and whether investors can profit by following the “smart money”. We document an immediate spike in trading volume and abnormal returns at the time of the CNBC coverage. We also observe patterns in underlying stock prices and trading activities, consistent with the evidence of gamma squeeze. More importantly, while options trades significantly predict stock returns prior to the CNBC coverage, there is a significant reversal in underlying stock prices following the CNBC coverage. Using similar criteria, we identify unusual option activities for a large sample of stocks from OptionMetrics. We show that options trades significantly predict underlying stock returns and there is no evidence of reversal in underlying stock price. Our findings suggest that the CNBC coverage of unusual option activity has a destabilizing effect on underlying stock prices and investors cannot profit by simply following the CNBC reporting on the “smart money”.
Keywords: Options trading, Return predictability, Media coverage, Investor attention
JEL Classification: G12, G14
Suggested Citation: Suggested Citation