40 Pages Posted: 10 Nov 2020 Last revised: 2 Feb 2021
Date Written: October 5, 2020
This paper improves continuous-time variance swap approximation formulas to derive exact returns on benchmark VIX option portfolios. The new methodology preserves the variance swap interpretation that decomposes returns into realized variance and option implied-variance.
We apply this new methodology to explore return momentum on option portfolios across different S&P 500 stocks. We find that stock options with high historical returns continue to outperform options with low returns. This predictability has a quarterly pattern, resembling the pattern of stock momentum found by Heston and Sadka (2008). In contrast to stock momentum, option momentum lasts for up to five years, and does not reverse.
Keywords: Options, Momentum, Behavioral finance
JEL Classification: G13,G14,G41
Suggested Citation: Suggested Citation