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Index Option Prices and Stock Market Momentum

Author

Listed:
  • Kaushik Amin

    (Lehman Brothers)

  • Joshua D. Coval

    (Harvard University)

  • H. Nejat Seyhun

    (University of Michigan)

Abstract

We test the prediction of standard option pricing models that there should be no relation between option prices and past stock market movements. Using the Standard and Poor's 100 index options (OEX options) prices from 19831995, we document that OEX calls are significantly overvalued relative to OEX puts after large stock price increases. The reverse is true after large stock price decreases. These valuation effects are both economically and statistically significant. Our results suggest that past stock returns exert an important influence on index option prices.

Suggested Citation

  • Kaushik Amin & Joshua D. Coval & H. Nejat Seyhun, 2004. "Index Option Prices and Stock Market Momentum," The Journal of Business, University of Chicago Press, vol. 77(4), pages 835-874, October.
    • Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:4:p:835-874
    DOI: 10.1086/422440
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    Cited by:

    1. Liu, Qing & Wang, Shouyang & Sui, Cong, 2023. "Risk appetite and option prices: Evidence from the Chinese SSE50 options market," International Review of Financial Analysis, Elsevier, vol. 86(C).
    2. Chuang, Wen-I & Huang, Teng-Ching & Lin, Bing-Huei, 2013. "Predicting volatility using the Markov-switching multifractal model: Evidence from S&P 100 index and equity options," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 168-187.
    3. Shackleton, Mark B. & Voukelatos, Nikolaos, 2013. "Hedging efficiency in the Greek options market before and after the financial crisis of 2008," Journal of Multinational Financial Management, Elsevier, vol. 23(1), pages 1-18.
    4. Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009. "Demand-Based Option Pricing," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 4259-4299, October.
    5. Corò, Filippo & Dufour, Alfonso & Varotto, Simone, 2013. "Credit and liquidity components of corporate CDS spreads," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5511-5525.
    6. Siu Kai Choy & Jason Wei, 2022. "Option trading and returns versus the 52‐week high and low," The Financial Review, Eastern Finance Association, vol. 57(3), pages 691-726, August.
    7. Gilstrap, Collin & Petkevich, Alex & Teterin, Pavel, 2020. "Striking up with the in crowd: When option markets and insiders agree," Journal of Banking & Finance, Elsevier, vol. 120(C).
    8. Chalamandaris, Georgios & Rompolis, Leonidas S., 2012. "Exploring the role of the realized return distribution in the formation of the implied volatility smile," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1028-1044.
    9. Han-Ching Huang & Chien-Sheng Wen, 2021. "The Performance of Trading Strategies Based on Deviations from Put-Call Parity of Stock Options," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 11(2), pages 1-3.
    10. Rodriguez, J.C., 2007. "Option Pricing and Momentum," Discussion Paper 2007-93, Tilburg University, Center for Economic Research.
    11. Chiang, Min-Hsien & Huang, Hsin-Yi, 2011. "Stock market momentum, business conditions, and GARCH option pricing models," Journal of Empirical Finance, Elsevier, vol. 18(3), pages 488-505, June.
    12. Ging-Ginq Pan & Yung-Ming Shiu & Tu-Cheng Wu, 2019. "Is trading in the shortest-term index options profitable?," Review of Derivatives Research, Springer, vol. 22(1), pages 169-201, April.
    13. Brian Du, 2019. "Relative option liquidity and price efficiency," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1119-1135, May.
    14. Zaremba, Adam & Mikutowski, Mateusz & Szczygielski, Jan Jakub & Karathanasopoulos, Andreas, 2021. "The alpha momentum effect in commodity markets," Energy Economics, Elsevier, vol. 93(C).
    15. Onan, Mustafa & Salih, Aslihan & Yasar, Burze, 2014. "Impact of macroeconomic announcements on implied volatility slope of SPX options and VIX," Finance Research Letters, Elsevier, vol. 11(4), pages 454-462.
    16. Scott Fung & Robert Loveland, 2020. "When do informed traders acquire and trade on informational advantage? Evidence from Federal Reserve stress tests," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(10), pages 1459-1485, October.
    17. Byeong-Je An & Andrew Ang & Turan G. Bali & Nusret Cakici, 2014. "The Joint Cross Section of Stocks and Options," Journal of Finance, American Finance Association, vol. 69(5), pages 2279-2337, October.
    18. Atilgan, Yigit, 2014. "Volatility spreads and earnings announcement returns," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 205-215.
    19. Rodriguez, J.C., 2007. "Option Pricing and Momentum," Other publications TiSEM c3d95a76-1818-4543-87f5-b, Tilburg University, School of Economics and Management.
    20. Leippold, Markus & Su, Lujing, 2015. "Collateral smile," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 15-28.
    21. Byun, Suk-Joon & Kim, Da-Hea, 2016. "Gambling preference and individual equity option returns," Journal of Financial Economics, Elsevier, vol. 122(1), pages 155-174.
    22. Luiz Félix & Roman Kräussl & Philip Stork, 2020. "Implied volatility sentiment: a tale of two tails," Quantitative Finance, Taylor & Francis Journals, vol. 20(5), pages 823-849, May.
    23. Lovreta, Lidija & Silaghi, Florina, 2020. "The surface of implied firm’s asset volatility," Journal of Banking & Finance, Elsevier, vol. 112(C).
    24. Bing Han & Gang Li, 2021. "Information Content of Aggregate Implied Volatility Spread," Management Science, INFORMS, vol. 67(2), pages 1249-1269, February.
    25. Michael Lemmon & Sophie Xiaoyan Ni, 2014. "Differences in Trading and Pricing Between Stock and Index Options," Management Science, INFORMS, vol. 60(8), pages 1985-2001, August.

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