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Option trading after the opening bell and intraday stock return predictability

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  • Kelley Bergsma
  • Andy Fodor
  • Vijay Singal
  • Jitendra Tayal

Abstract

Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option‐to‐stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options’ bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.

Suggested Citation

  • Kelley Bergsma & Andy Fodor & Vijay Singal & Jitendra Tayal, 2020. "Option trading after the opening bell and intraday stock return predictability," Financial Management, Financial Management Association International, vol. 49(3), pages 769-804, September.
    • Handle: RePEc:bla:finmgt:v:49:y:2020:i:3:p:769-804
    DOI: 10.1111/fima.12284
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