Abstract:
Returns on many cross-sectional asset pricing anomalies are disproportionately prevalent among stocks with high option trading volume. To quantify this phenomenon, we propose a measure called the Option Trading-Implied Prevalence (OTP). Anomalies related to momentum, volatility, and profitability exhibit consistently high OTP values. In the cross-section of anomalies, OTP is positively related to established mispricing classifications proposed in the literature. Moreover, high-OTP anomalies are associated with elevated returns around earnings announcements. Finally, we show that option end users accumulate long positions in high-OTP anomaly portfolios—both ahead of earnings announcements and during normal periods.
