Option Gamma and Stock Returns

55 Pages Posted: 24 Oct 2022 Last revised: 4 Nov 2022

See all articles by Amar Soebhag

Amar Soebhag

Erasmus University Rotterdam (EUR) - Department of Business Economics; Robeco Asset Management

Date Written: October 23, 2022

Abstract

Stocks with high net gamma exposure robustly underperform stocks with low net gamma exposure by 10% per year. This effect is distinct from multiple previously documented return predictors, and survives many robustness checks. We show that stocks with low net gamma exposure negatively predicts future realized volatility. We argue that investors command a risk premium to hold low net gamma exposure stocks, which are riskier. Lastly, we show that the volatility predictability stems from a non-informational channel, and not from private information.

Keywords: Cross-section of stock returns, option demand, gamma hedging, return predictability

JEL Classification: G00, G11, G12, G14

Suggested Citation

Soebhag, Amar, Option Gamma and Stock Returns (October 23, 2022). Available at SSRN: https://ssrn.com/abstract=4256259 or http://dx.doi.org/10.2139/ssrn.4256259

Amar Soebhag (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

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