Unusual Option Activity: Is it Smart to Follow ‘Smart Money’?
90 Pages Posted: 29 Jun 2020
Date Written: June 3, 2020
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. 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. 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