Option Momentum |
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| Authors: | STEVEN L HESTON CHRISTOPHER S JONES MEHDI KHORRAM SHUAIQI LI HAITAO MO |
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| Institution: | 1. Correspondence: Haitao Mo, School of Business at the University of Kansas, Capitol Federal Hall, Room 4116, Lawrence, KS 66045;2. e-mail: haitaomo@ku.edu.;3. Steven L. Heston is with the Smith School of Business at the University of Maryland. Christopher S. Jones is with the Marshall School of Business at the University of Southern California. Mehdi Khorram is with the Saunders College of Business at the Rochester Institute of Technology. Shuaiqi Li is with the Department of Economics and Finance at the City University of Hong Kong. Haitao Mo is in the School of Business at the University of Kansas. This paper includes results that previously appeared in two working papers. We are grateful for comments from our discussants, Bjorn Eraker (AFA);4. Alexander Philipov (NFA);5. Zhiguang Wang (SWFA);6. Rohit Allena (FMA);7. and Xiaoyan Zhang (CICF);8. from seminar participants at the University of Maryland, Baruch College, NYU Tandon, ITAM, and the Virtual Derivatives Workshop;9. and from Peter Carr;10. Pedro Garcia-Ares;11. Juhani Linnainmaa;12. Dilip Madan;13. Aurelio Vasquez;14. and Liuren Wu. We thank two referees, an Associate Editor, and the Editor, Stefan Nagel, for their many suggestions. All errors are our own. We have no conflicts of interest to report. |
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| Abstract: | This paper investigates the performance of option investments across different stocks by computing monthly returns on at-the-money straddles on individual equities. We find that options with high historical returns continue to significantly outperform options with low historical returns over horizons ranging from 6 to 36 months. This phenomenon is robust to including out-of-the-money options or delta-hedging the returns. Unlike stock momentum, option return continuation is not followed by long-run reversal. Significant returns remain after factor risk adjustment and after controlling for implied volatility and other characteristics. Across stocks, trading costs are unrelated to the magnitude of momentum profits. |
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