Option Informed Stock Picking

http://jai.pm-research.com/content/21/1/48

Posted: 6 Jun 2019

See all articles by Edward Szado

Edward Szado

Providence College

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management

Thomas Schneeweis

University of Massachusetts Amherst - Isenberg School of Management

Date Written: November 12, 2016

Abstract

A wide range of research has suggested that informed trading in options markets may effectively signal subsequent changes in equity prices. In this paper, we analyze the performance of long/short strategies based on a number of signals from options markets.

In addition, we create an easily implemented long-only strategy based on a subset of the signals (volatility risk premium, option/stock volume ratio, implied volatility skew and realized volatility). In order to minimize transaction costs and liquidity issues we restrict our analysis to S&P 500 constituents, we rebalance our portfolio monthly and limit our holdings to 50 individual stocks.

Our analysis of the period from 1996 through mid-2015 shows significant outperformance of a long-only equal weighted portfolio of 50 stocks (similar results were found when considering 10-stock portfolios), relative to the S&P 500 and the equal weighted S&P 500. A return attribution analysis confirms that the outperformance is provided by individual stock selection rather than sector selection.

Keywords: Implied Volatility, Stock Picking, Skew, Option Volume

JEL Classification: G11, G12, G14

Suggested Citation

Szado, Edward and Kazemi, Hossein B. and Schneeweis, Thomas, Option Informed Stock Picking (November 12, 2016). http://jai.pm-research.com/content/21/1/48, Available at SSRN: https://ssrn.com/abstract=3390757 or http://dx.doi.org/10.2139/ssrn.3390757

Edward Szado (Contact Author)

Providence College ( email )

United States

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Thomas Schneeweis

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States
413-545-5641 (Phone)
413-545-3858 (Fax)

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