Hostname: page-component-745bb68f8f-hvd4g Total loading time: 0 Render date: 2025-01-26T02:51:14.534Z Has data issue: false hasContentIssue false
  • English
  • Français

Trading in the Options Market around Financial Analysts’ Consensus Revisions

Published online by Cambridge University Press:  20 May 2014

Darren K. Hayunga  and
Peter P. Lung
Darren K. Hayunga
Affiliation:
[email protected], Terry College of Business, University of Georgia, 310 Herty Dr, Athens, GA 30602
Peter P. Lung
Affiliation:
[email protected], Daniels College of Business, University of Denver, 2101 S University Blvd, Denver, CO 80208.
Get access Rights & Permissions [Opens in a new window]

Abstract

This article investigates the options market around a revision in the financial analysts’ consensus recommendation. The results demonstrate that options investors trade in the correct direction of the upcoming revision approximately 3 days prior to the announcement. We find this behavior in option-implied prices, implied volatilities, and options trading volume. Tests confirm that the options market leads the stock market before the financial analysts’ revision. Moreover, using all firms with outstanding options, an out-of-sample analysis produces a profitable zero-cost trading strategy net of transaction costs based on the relative valuations between the synthetic and the underlying equity security.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 3 , June 2014 , pp. 725 - 747
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acharya, V., and Johnson, T.. “Insider Trading in the Credit Derivatives.” Journal of Financial Economics, 84 (2007), 110–141.Google Scholar
Altınkılıç, O., and Hansen, R.. “On the Information Role of Stock Recommendation Revisions.” Journal of Accounting and Economics, 48 (2009), 17–36.Google Scholar
Anand, A., and Chakravarty, S.. “Stealth Trading in Options Markets.” Journal of Financial and Quantitative Analysis, 42 (2007), 167–187.Google Scholar
Barber, B.; Lehavy, R.; McNichols, M.; and Trueman, B.. “Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns.” Journal of Finance, 56 (2001), 531–563.CrossRefGoogle Scholar
Barone-Adesi, G., and Whaley, R.. “The Valuation of American Call Options and the Expected Ex-Dividend Stock Price Decline.” Journal of Financial Economics, 17 (1986), 91–111.Google Scholar
Battalio, R., and Schultz, P.. “Options and the Bubble.” Journal of Finance, 61 (2006), 2071–2102.CrossRefGoogle Scholar
Boehmer, E.; Musumeci, J.; and Poulsen, A.. “Event-Study Methodology Under Conditions of Event-Induced Variance.” Journal of Financial Economics, 30 (1991), 253–272.Google Scholar
Callen, J., and Segal, D.. “Do Accruals Drive Firm-Level Stock Returns? A Variance Decomposition Analysis.” Journal of Accounting Research, 42 (2004), 527–560.Google Scholar
Cao, C.; Chen, Z.; and Griffin, J.. “Informational Content of Option Volume Price to Takeovers.” Journal of Business, 78 (2005), 1073–1109.Google Scholar
Cooper, M.; Gulen, H.; and Schill, M.. “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 1609–1651.CrossRefGoogle Scholar
Cremers, M., and Weinbaum, D.. “Deviations from Put-Call Parity and Stock Return Predictability.” Journal of Financial and Quantitative Analysis, 45 (2010), 335–367.Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Gleason, C., and Lee, C.. “Analyst Forecast Revisions and Market Price Discovery.” Accounting Review, 78 (2003), 193–225.CrossRefGoogle Scholar
Hasbrouck, J. “One Security, Many Markets: Determining the Location of Price Discovery.” Journal of Finance, 50 (1995), 1175–1199.Google Scholar
Hou, K., and Moskowitz, T.. “Market Frictions, Price Delay, and the Cross-Section of Expected Returns.” Review of Financial Studies, 18 (2005), 981–1020.Google Scholar
Jayaraman, N.; Frye, M.; and Sabherwal, S.. “Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market.” Financial Review, 36 (2001), 45–74.Google Scholar
Jegadeesh, N.; Kim, J.; Krische, S.; and Lee, C.. “Analyzing the Analysts: When Do Recommendations Add Value?” Journal of Finance, 59 (2004), 1083–1124.Google Scholar
Jin, W.; Livnat, J.; and Zhang, Y.. “Option Prices Leading Equity Prices: Do Option Traders Have an Information Advantage?” Journal of Accounting Research, 50 (2012), 401–432.Google Scholar
Lung, P., and Xu, P.. “Tipping and Option Trading.” Financial Management, forthcoming (2014).Google Scholar
Ofek, E.; Richardson, M.; and Whitelaw, R.. “Limited Arbitrage and Short Sales Restrictions: Evidence from the Option Markets.” Journal of Financial Economics, 74 (2004), 305–342.Google Scholar
Ohlson, J. “Financial Ratios and the Probabilistic Prediction of Bankruptcy.” Journal of Accounting Research, 18 (1980), 109–131.Google Scholar
Roll, R.; Schwartz, E.; and Subrahmanyam, A.. “O/S: The Relative Trading Activity in Options and Stock.” Journal of Financial Economics, 96 (2010), 1–17.Google Scholar
Welch, I. “Herding Among Security Analysts.” Journal of Financial Economics, 58 (2000), 369–396.Google Scholar
Xing, Y.; Zhang, X.; and Zhao, R.. “What Does the Individual Option Volatility Smirk Tell Us About Future Equity Returns?” Journal of Financial and Quantitative Analysis, 45 (2010), 641–662.Google Scholar
Supplementary material: PDF

Hayunga Supplementary Material

Hayunga Supplementary Material

Download Hayunga Supplementary Material(PDF)
PDF 127.8 KB