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

74 Pages Posted: 29 Jun 2020 Last revised: 30 Aug 2021

See all articles by George J. Jiang

George J. Jiang

Washington State University

Cuyler Strong

U.S. Securities and Exchange Commission

Date Written: August 30, 2021

Abstract

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

Jiang, George and Strong, Cuyler, Unusual Option Activity: Is it Smart to Follow ‘Smart Money’? (August 30, 2021). 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)

U.S. Securities and Exchange Commission ( email )

Washington, DC

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