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Option Momentum

Author

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  • STEVEN L. HESTON
  • CHRISTOPHER S. JONES
  • MEHDI KHORRAM
  • SHUAIQI LI
  • HAITAO MO

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.

Suggested Citation

  • Steven L. Heston & Christopher S. Jones & Mehdi Khorram & Shuaiqi Li & Haitao Mo, 2023. "Option Momentum," Journal of Finance, American Finance Association, vol. 78(6), pages 3141-3192, December.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:6:p:3141-3192
    DOI: 10.1111/jofi.13279
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    Cited by:

    1. Xudong An & Saket Hegde & Harren Jan & Mete Kilic & Rodney Ramcharan, 2025. "The Fed Put and Bank Risk-Taking Evidence from the Loan Book," Working Papers 25-42, Federal Reserve Bank of Philadelphia.

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