Unusual Option Activity: Is it Smart to Follow ‘Smart Money’?

77 Pages Posted: 29 Jun 2020 Last revised: 3 May 2024

See all articles by George J. Jiang

George J. Jiang

Washington State University

Cuyler Strong

Wayne State University - Mike Ilitch School of Business

Date Written: May 3, 2024

Abstract

CNBC’s “Fast Money” show regularly covers unusual option activities (UOAs) and advocates these trades as “smart money” of informed traders. We investigate the informativeness of UOAs. To examine the impact of CNBC coverage, we further identify UOAs not covered by CNBC. We find that UOAs are indeed informative with significant predictive power of underlying stock returns. However, for UOAs covered by CNBC, there is an immediate overreaction at the time of reporting that is followed by subsequent reversal. Our findings suggest that CNBC coverage has a destabilizing effect on underlying stock prices and investors should not naively follow “smart money”.

Keywords: Options trading, Return predictability, Media coverage, Investor attention

JEL Classification: G12, G14

Suggested Citation

Jiang, George and Strong, Cuyler, Unusual Option Activity: Is it Smart to Follow ‘Smart Money’? (May 3, 2024). Available at SSRN: https://ssrn.com/abstract=3618427 or http://dx.doi.org/10.2139/ssrn.3618427

George Jiang

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Cuyler Strong (Contact Author)

Wayne State University - Mike Ilitch School of Business ( email )

5201 Cass Avenue
Detroit, MI 48202

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