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Senior Fellows/Fellows

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Senior Fellows/Fellows

Why Do Option Prices Predict Stock Returns

Luis GONCALVES-PINTO, Allaudeen HAMEED, Thijs VAN DER HEIJDEN, Yichao ZHU
Disagreement between the stock and options markets about the stock’s value can reflect both informed trading in options and temporary price pressure in stocks. We document that the dis-agreement is strongly related to return reversals, order imbalances, and illiquidity in stocks, and weakly relat...
Keywords: Price Pressure, Put-Call Parity, return predictability, Informed Trading
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Annual Conference

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Investment Finance, Senior Fellows/Fellows

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May 2016

Why Do Option Prices Predict Stock Returns? The Role of Price Pressure in the Stock Market

Luis GONCALVES-PINTO, Allaudeen HAMEED, Thijs VAN DER HEIJDEN, Yichao ZHU, Bruce GRUNDY
The distance between option-implied and traded stock prices (DOTS) predicts future stock returns. A trading strategy based on DOTS yields an alpha of 85 basis points on the day after portfolio formation. We show that DOTS is strongly related to return reversals, order imbalances, and transaction cos...
Keywords: Price Pressure, Put-Call Parity, return predictability, Informed Trading
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