Option trading after the opening bell and intraday stock return predictability. Issue 3 (18th August 2019)

• Record Type: Journal Article
• Authors: Bergsma, Kelley; Fodor, Andy; Singal, Vijay; Tayal, Jitendra
• Is Part Of: Financial management. Volume 49:Issue 3(2020:Autumn)
• Page Start: 769
• Page End: 804
• Publication Date: 2019-08-18
• Subjects: earnings announcements -- intraday trading -- option volume -- stock return predictability; Corporations -- Finance -- Periodicals; 658.1505
• DOI: 10.1111/fima.12284
• Languages: English
• ISSNs: 0046-3892

Abstract

Abstract: Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option‐to‐stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options' bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.