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The Value Line Enigma Extended - An Examination Of The Performance Of Option Recommendations, Jack B. Broughton, Don M. Chance

Business Faculty Articles and Research

We extend the research on the Value Line Enigma by examining the performance of call recommendations in Value Line Options. Galai's hedge decomposition procedure identifies the components of the calls' returns. Abnormal call returns were most pronounced immediately following the purchase, which is consistent with studies of Value Line's stock rankings. The largest and most significant abnormal performance was by calls assigned the highest rank written on stocks judged by Value Line to be correctly priced. Abnormal call return performance by joint call and stock ranks was consistent with the hypothesis that Value Line identifies underpriced call options.