Returns and option activity over the option-expiration week for S&P 100 stocks |
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Authors: | Chris Stivers Licheng Sun |
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Institution: | 1. Department of Finance, College of Business, University of Louisville, Louisville, KY 40292, United States;2. Department of Finance, College of Business, Old Dominion University, Norfolk, VA 23529, United States |
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Abstract: | For S&P 100 stocks, we find that the weekly returns over option-expiration (OE) weeks (a month’s third-Friday week) tend to be high, relative to: (1) the third-Friday weekly returns of other stocks with less option activity, (2) the own stock’s other weekly returns, (3) the risk, based on asset-pricing alphas. For these same stocks, a month’s fourth-Friday weekly returns underperform modestly. We suggest the following two avenues are likely partial contributors towards understanding these return patterns: (1) delta-hedge rebalancing by option market makers, with a reduction in short-stock hedge positions over the OE week, and (2) declining risk perceptions over the OE week, as measured by option-derived implied volatilities. Our findings suggest option activity can induce reliable patterns in the weekly returns of option-active large-cap stocks. |
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Keywords: | G12 G13 G14 |
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