Option returns: a tale of the expiration rollover day
A new study finds that most predictable returns and famous anomalies in delta-hedged equity options are not due to market inefficiency or investor errors. Instead, they result from heavy trading and order imbalances on two key days each month: options expiration Friday and the following Monday. Covered call writers rolling over positions create a surge of sell orders, driving down option prices. This 'rollover effect' explains over half of abnormal option returns, challenging long-held beliefs about market behavior.
What it examines
This paper investigates why option returns, especially delta-hedged returns, show predictable patterns. The authors focus on two key days each month—option expiration Friday and the following Monday—when large order imbalances from rolling over positions create price pressure. The study uses detailed trading and return data to analyze these effects.
What it concludes
The study finds that most option return anomalies are caused by concentrated trading and liquidity frictions around expiration days, not by market inefficiency. This insight helps traders, market makers, and researchers better understand option pricing and risk. Future research could explore similar effects in other derivatives markets.
Evidence objects
Intense trading and order imbalances on just two days each monththe third Friday and following Mondaycause most predictable returns and anomalies in delta-hedged equity options, not market inefficiency or investor mistakes.
key_findings bullet 1 · key_findings · validation V0
On these 'rollover' days, covered call writers flood the market with sell orders, overwhelming market makers who lower option prices to manage risk, resulting in highly negative option returns compared to other days.
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The study finds this 'rollover effect' explains over half of abnormal option returns and all S&P 500 predictability, challenging behavioral bias theories, though its focus on U.S. markets may limit global applicability.
key_findings bullet 3 · key_findings · validation V0
This paper uniquely attributes delta-hedged option return anomalies to intermediary frictions and systematic order imbalances on two key rollover days, rather than mispricing or behavioral biases. Its robust empirical analysis across 18 anomalies, especially in S&P 500 options, offers a novel, compelling microstructure-based explanation, advancing volatility modeling research.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- … return predictability is concentrated around expiration. Conversely, when isolating the rollover period, we find that expiration effects dominate option return predictability. …
Source row: 1519 · abstract type: snippet