Do Options Price Predictable Patterns in Future Stock Returns? Evidence from Accounting Anomalies
57 Pages Posted: 22 Apr 2015 Last revised: 25 Sep 2015
Date Written: August 1, 2015
Abstract
We examine whether option prices correct for predictable bias in stock prices associated with accounting anomalies. Evidence from put-call parity violations suggests that they do not. Rather, option prices accurately track contemporaneous stock prices. Further analysis suggests that high costs of trading options — implied volatility premiums and transaction costs — could prevent traders from exploiting these profit opportunities. However, we find some evidence of unexploited profit opportunities of significant magnitudes, even after transaction costs, for trading strategies that sell options. Our results suggest that option prices mechanically incorporate contemporaneous stock prices, and therefore reflect the exact forms of mispricing present in stock prices.
Keywords: Accounting signals, equity options, put-call parity, transaction costs
JEL Classification: G12, G14, M41
Suggested Citation: Suggested Citation