Option trading volume and the cross-section of option returns

Jianglei Yuan, Dehong Liu, Carl R. Chen and Sen Hu

The North American Journal of Economics and Finance, 2024, vol. 74, issue C

Abstract: This paper examines a novel pattern of option return predictability. Specifically, we find option trading volume negatively and significantly predicts the cross-section of delta-hedged option returns. Our portfolio strategies of option trading volume yield significant returns in options across different moneyness and time to maturity. Furthermore, the evidence shows that market capitalization and idiosyncratic volatility are able to explain the predictability of option trading volume on option returns. Our results are robust to alternative measures of option returns and option subsamples.

Keywords: Option trading volume; Cross-Section of option returns; Risk factor models (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:74:y:2024:i:c:s1062940824001542

DOI: 10.1016/j.najef.2024.102229

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