Option Factor Momentum

Abstract

We document profitable cross-sectional and time-series momentum in a broad set of 56 option factors constructed from monthly sorts on daily delta-hedged option positions. Option factor returns are highly autocorrelated, but momentum profits of strategies with longer formation periods are mainly driven by high mean returns that persistently differ across factors. Momentum effects are the strongest in the factors’ largest principal components, consistent with findings for stock factor momentum. Finally, we find a new form of momentum in options markets: momentum in single delta-hedged option returns. Option factor momentum fully subsumes option momentum, whereas option momentum cannot explain option factor momentum. Our findings provide insights into the channels that drive option momentum and have implications for designing profitable option trading strategies.

Keywords: Options, momentum, factor momentum

JEL Classification: G11, G12, G14