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

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