Option Momentum

Steven L. Heston; Christopher S. Jones; MEHDI KHORRAM; SHUAIQI LI; Haitao Mo

doi:10.1111/jofi.13279

Journal of Finance Vol. 78 No. 6 2023

Option Momentum

Steven L. Heston^1,2,3,4,5,6; Christopher S. Jones⁷; MEHDI KHORRAM^1,2,3,4,5,6; SHUAIQI LI ^1,2,3,4,5,6; Haitao Mo^{1,2,3,4,5,8,6}

¹ University of Southern California · ² Baruch College · ³ Rochester Institute of Technology · ⁴ City University of Hong Kong · ⁵ California Southern University · ⁶ University of Maryland, College Park · ⁷ University of Kansas · ⁸ The Centers

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.

DOI: 10.1111/jofi.13279
Volume: 78
Issue: 6
Pages: 3141-3192
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Option Momentum

Abstract

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