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Option Return Predictability, Jie Cao, Han Bing, Qing Tong, Xintong Zhan

Research Collection Lee Kong Chian School Of Business

We show the cross-section of equity option returns can be predicted by a variety of underlying stock characteristics and firm fundamentals, including idiosyncratic volatility, past stock returns, profitability, cash holding, new share issuance, and dispersion of analyst forecasts. Such predictability is not mechanically inherited from the stock market because these variables do not significantly predict stock returns in our sample, and our results hold for delta-hedged calls and puts in the same directions. We document new option trading strategies that are profitable even after transaction costs. These profits are robust across different market conditions and subsamples. They cannot be explained …