Articles Related with Options Trading Strategies: Reading List

On Feb. 2018:

I.

Dubinsky A, Johannes M. Fundamental uncertainty, earning announcements and equity options[R]. Working paper, 2006.

Abstract:

This paper uses option prices to learn about the uncertainty surrounding the fundamental information that is revealed on earnings announcement dates. To do this, we introduce a reduced-form model and estimators to separate the uncertainty over the information revealed on earnings dates from normal day-to-day volatility. The fundamental uncertainty estimators are easy to compute and rely only on option price information available prior to the announcement. Empirically, we find strong support for our reduced form specification and investigate the fundamental uncertainty estimators. We find that they are quantitatively large, vary over time, and are informative about the future volatility of stock price movements. Finally, we quantify the impact of earnings announcements on formal option pricing models.

II.

Xing Y, Zhang X. Anticipating uncertainty: Straddles around earnings announcements[J]. 2013.

Abstract:

Straddles on individual stocks generally earn significantly negative returns. However, average at-the-money straddles from three days before an earnings announcement to the announcement date yield a highly significant 3.34% return. The positive returns on straddles indicate that investors under-estimate the magnitude of uncertainty around earnings announcements. We find positive straddle returns are more pronounced for smaller firms, firms with higher volatility, higher kurtosis, more volatile past earnings surprises and less trading volume/higher transaction costs. This
suggests that when firm signals are noisy, and/or when it is costlier to trade, investors underestimate the uncertainty associated with earnings announcements.

III.

Cremers M, Fodor A, Weinbaum D. How Do Informed Option Traders Trade? Option Trading Activity, News Releases, and Stock Return Predictability[J]. 2017.

Abstract:

We examine how informed traders trade in the option market around news announcements. Option traders are more active, and their trades more informative, both immediately before news days and on news days. How informed option traders implement their trades depends on when they trade and whether news releases are scheduled: we predict and find that informed option traders use short positions (instead of long positions) before scheduled news announcements. Purchases of options thus predict returns on news days and ahead of unscheduled events, but not before scheduled events, and sales of options are informative only ahead of scheduled news releases.

IV.

Jones C S, Shemesh J. Option Mispricing Around Nontrading Periods[J]. The Journal of Finance, 2017.

Abstract:

We find that option returns are significantly lower over nontrading periods, the vast majority of which are weekends. Our evidence suggests that nontrading returns cannot be explained by risk, but rather are the result of widespread and highly persistent option mispricing driven by the incorrect treatment of stock return variance during periods of market closure. The size of the effect implies that the broad spectrum of finance research involving option prices should account for nontrading effects. Our study further suggests how alternative industry practices could improve the efficiency of option markets in a meaningful way.