Momentum, Reversal, and Seasonality in Option Returns

85 Pages Posted: 17 Nov 2020 Last revised: 20 Nov 2020

See all articles by Christopher S. Jones

Christopher S. Jones

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Mehdi Khorram

Rochester Institute of Technology (RIT)

Haitao Mo

University of Kansas

Multiple version iconThere are 3 versions of this paper

Date Written: November 16, 2020

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

Suggested Citation

Jones, Christopher S. and Khorram, Mehdi and Mo, Haitao, Momentum, Reversal, and Seasonality in Option Returns (November 16, 2020). Available at SSRN: https://ssrn.com/abstract=3705500 or http://dx.doi.org/10.2139/ssrn.3705500

Christopher S. Jones (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

Mehdi Khorram

Rochester Institute of Technology (RIT) ( email )

Rochester, NY 14623
United States

Haitao Mo

University of Kansas

Lawrence, KS 66045
United States

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