The joint cross section of stocks and options

Stocks with large increases in call implied volatilities over the previous month tend to have high future returns while stocks with large increases in put implied volatilities over the previous month tend to have low future returns. Sorting stocks ranked into decileportfolios by past call implied volatilities produces spreads in average returns of approximately 1% per month, and the return differences persist up to six months. The cross section of stock returns also predicts option-implied volatilities, with stocks withhigh past returns tending to have call and put option contracts which exhibit increases in implied volatility over the next month, but with decreasing realized volatility. These predictability patterns are consistent with rational models of informed trading.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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