Large-Caps Do Well Before Options Expiration

This is interesting:

Over 1983 to 2008, we find that large-cap stocks with actively traded options tend to have substantially higher average weekly returns during option-expiration weeks (ending on a month’s third-Friday), with consistent subperiod results. This empirical regularity is also evident in large-cap-dominated stock portfolios. Further, over the 1996 to 2008 period with available Option Metrics data, we find that the average weekly stock returns for option-expiration weeks tend to be appreciably larger for option-expiration weeks that also experience a relatively high option trading volume, relative to the underlying stock trading volume. In contrast, the average weekly returns for the option-expiration week are not much different than other weeks for smaller-cap stock portfolios, which contain stocks with relatively less option trading activity. Further, for our sample of large-cap stocks, the average weekly stock returns for the third-Friday of a calendar month are not different than other weeks for a pre-option-market sample over 1948 to 1972. We provide additional evidence that, along with the option market evidence in Lakonishok, Lee, Pearson, and Poteshman (2007), suggests that the sizable written call activity from non-market makers may contribute towards understanding our empirical findings.

Posted by on April 21st, 2010 at 11:18 pm


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