Option Momentum

40 Pages Posted: 10 Nov 2020 Last revised: 2 Feb 2021

See all articles by Steven L. Heston

Steven L. Heston

University of Maryland - Department of Finance

Shuaiqi Li

University of Maryland, R.H Smith School of Business

Date Written: October 5, 2020

Abstract

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

Heston, Steven L. and Li, Shuaiqi, Option Momentum (October 5, 2020). Available at SSRN: https://ssrn.com/abstract=3705573 or http://dx.doi.org/10.2139/ssrn.3705573

Steven L. Heston (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

Shuaiqi Li

University of Maryland, R.H Smith School of Business ( email )

7621 Mowatt Ln
College Park, MD 20742

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