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Show me the money: Option moneyness concentration and future stock returns

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  • Kelley Bergsma
  • Vivien Csapi
  • Dean Diavatopoulos
  • Andy Fodor

Abstract

Informed traders often use options that are not in‐the‐money due to higher potential gains for a smaller upfront cost. Thus, trading activity by option moneyness should be a gauge of informed option trading. We construct a dollar volume‐weighted average moneyness measure to capture option trading activity at different moneyness levels. Stock returns increase with this measure, suggesting more trading activity in options with higher leverage predicts future stock returns. Our results hold cross‐sectionally and at the portfolio level yielding a Fama–French five‐factor α of 12% per year for all stocks and 33% per year for high implied volatility stocks.

Suggested Citation

  • Kelley Bergsma & Vivien Csapi & Dean Diavatopoulos & Andy Fodor, 2020. "Show me the money: Option moneyness concentration and future stock returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(5), pages 761-775, May.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:5:p:761-775
    DOI: 10.1002/fut.22071
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    References listed on IDEAS

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    Cited by:

    1. George J. Jiang & Guanzhong Pan, 2022. "Speculation or hedging?—Options trading prior to FOMC announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(2), pages 212-230, February.
    2. Mengyu Zhang & Thanos Verousis & Iordanis Kalaitzoglou, 2022. "Information and the arrival rate of option trading volume," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(4), pages 605-644, April.
    3. Zin Yau Heng & Henry Leung, 2023. "The role of option‐based information on StockTwits, options trading volume, and stock returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(8), pages 1091-1125, August.

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