Equity Option Return Predictability and Expiration Days

68 Pages Posted: 31 Oct 2023 Last revised: 29 Feb 2024

See all articles by Pedro Angel Garcia-Ares

Pedro Angel Garcia-Ares

Instituto Tecnológico Autónomo de México (ITAM)

Date Written: October 8, 2023

Abstract

Studies of option return predictability use monthly delta-hedged option returns that are large, negative and significant. We find that negative return spikes, stemming from option rolling and stock pinning activity around expiration Fridays, drive these returns. We propose the use of rollover returns that, unlike current conventions for estimating option returns, use prices from the highest volume option contracts and mitigate expiration day trading effects. We find, using these rollover returns, that the predictive ability of option and stock characteristics for future option returns is much weaker that previously reported.

Keywords: Delta-hedged option returns, Straddles, Expiration day, Stock pinning, Rollover, Option return predictability, Option market efficiency, Option Factor Models.

JEL Classification: G11, G12, G14, G32.

Suggested Citation

Garcia-Ares, Pedro Angel, Equity Option Return Predictability and Expiration Days (October 8, 2023). Available at SSRN: https://ssrn.com/abstract=4595840 or http://dx.doi.org/10.2139/ssrn.4595840

Pedro Angel Garcia-Ares (Contact Author)

Instituto Tecnológico Autónomo de México (ITAM)

Av. Camino a Sta. Teresa 930
Col. Héroes de Padierna
Mexico City, D.F. 01000, Federal District 01080
Mexico

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