Option Momentum

Steven L. Heston; Christopher S. Jones; Mehdi Khorram; Shuaiqi Li; Haitao Mo

doi:10.1111/jofi.13279

Option Momentum

Steven L. Heston, Christopher S. Jones, Mehdi Khorram, Shuaiqi Li, Haitao Mo^*

^*Corresponding author for this work

Department of Economics and Finance

Research output: Journal Publications and Reviews › RGC 21 - Publication in refereed journal › peer-review

12 Citations (Scopus)

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.

© 2023 the American Finance Association.

Original language	English
Pages (from-to)	3141-3192
Journal	Journal of Finance
Volume	78
Issue number	6
Online published	17 Sept 2023
DOIs	https://doi.org/10.1111/jofi.13279
Publication status	Published - Dec 2023

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title = "Option Momentum",

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.{\textcopyright} 2023 the American Finance Association.",

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AU - Mo, Haitao

PY - 2023/12

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N2 - 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.© 2023 the American Finance Association.

AB - 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.© 2023 the American Finance Association.

UR - https://www.webofscience.com/wos/woscc/full-record/WOS:001076802700001

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DO - 10.1111/jofi.13279

M3 - RGC 21 - Publication in refereed journal

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SP - 3141

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JO - Journal of Finance

JF - Journal of Finance

IS - 6

ER -

Option Momentum

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