A growing body of research has recently investigated anomalies in option returns, such as option return momentum, and these anomalies are often attributed to market inefficiencies. Reference [1], however, proposed and tested a different hypothesis: these anomalies originate from option returns around expiration days.
Specifically, the author isolated the return of delta-hedged call options on the option expiration day—i.e., the third Friday of the month—and the following Monday to examine how these returns contribute to overall monthly option performance. They pointed out,
This paper identifies expiration-driven liquidity effects as a key driver of option return anomalies. We show that predictable option returns are largely concentrated around expiration, when investors rolling over positions create large order imbalances that overwhelm market makers’ risk-bearing capacity. These frictions lead to significant price distortions, explaining much of the observed anomaly predictability.
Our findings reveal that more than half of the monthly anomaly returns occur during the two-day expiration window, while returns outside this period are significantly weaker. This pattern holds across a broad set of stock, fundamental, and option characteristics and is particularly pronounced for S&P 500 stocks, where expiration fully accounts for anomaly returns.
These results challenge the view that option anomalies reflect behavioral biases or inefficiencies. Instead, they highlight the role of intermediary constraints and systematic liquidity demands in shaping option prices. Future research could further explore the impact of expiration dynamics on market participants and whether similar patterns exist in other derivative markets.
In short, the paper demonstrates that expiration effects are a major determinant of option return patterns. Many well-documented anomalies weaken or disappear when the expiration window is excluded, while return predictability is concentrated around expiration.
The authors also provide an explanation for the negative option returns observed near expiration, attributing them to the rollover of covered call positions. Finally, the paper highlights the role of market maker constraints and systematic liquidity demands in shaping option prices.
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References
[1] Pedro A. Garcia-Ares and Dmitriy Muravyev, Option returns: a tale of the expiration rollover day, 2025, fma.org
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