Informed Traders, Long-Dated Options, and the Cross Section of Stock Returns

55 Pages Posted: 29 Sep 2017

See all articles by Mark Clements

Mark Clements

Los Angeles Capital Management

Vitali Kalesnik

Research Affiliates Global Advisors

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER); Kepos Capital

Date Written: September 26, 2017

Abstract

Option prices predict the cross section of equity returns. We show that, unconditionally, the prices of long-dated options contain all the information relevant for predicting returns. Information, however, shifts towards short-dated options when an earnings announcement is imminent and when options are cheap to trade. The difference between short- and long-dated options also predicts the timing of merger announcements. Our results are consistent with option prices reflecting the actions of informed traders, and with these traders optimally choosing option maturities to maximize the value of their information.

Keywords: Option Prices, Cross-Section, Equity Returns, Options

JEL Classification: G10

Suggested Citation

Clements, Mark and Kalesnik, Vitali and Linnainmaa, Juhani T., Informed Traders, Long-Dated Options, and the Cross Section of Stock Returns (September 26, 2017). Available at SSRN: https://ssrn.com/abstract=3043461 or http://dx.doi.org/10.2139/ssrn.3043461

Mark Clements

Los Angeles Capital Management ( email )

Los Angeles, CA 90025
United States

Vitali Kalesnik

Research Affiliates Global Advisors ( email )

16 Berkeley Street
London, W1J 8DZ
United Kingdom
+44 2039299880 (Phone)

HOME PAGE: http://https://www.researchaffiliates.com/en_us/home.html

Juhani T. Linnainmaa (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kepos Capital ( email )

620 Eighth Avenue
New York, NY 10018
United States

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