Momentum, Reversal, and Seasonality in Option Returns

Abstract

Option returns display substantial momentum using formation periods ranging
from 6 to 36 months long, with long/short portfolios obtaining annualized Sharpe
ratios above 1.5. In the short term, option returns exhibit reversal. Options also
show marked seasonality at multiples of three and 12 monthly lags. All of these
results are highly significant and stable in the cross section and over time. They
remain strong after controlling for other characteristics, and momentum and
seasonality survive factor risk-adjustment. Momentum is mainly explained by
an underreaction to past volatility and other shocks, while seasonality reflects
unpriced seasonal variation in stock return volatility.

Keywords: options, momentum, reversal, seasonality

JEL Classification: G12, G13, G11, C11