Momentum in the Option Market, Part 4-Intraday Case

Subscribe to newsletter

Momentum in the options market is an emerging and active area of research. For example, Reference [1] demonstrated that delta-hedged straddle positions exhibit momentum, where firms with strong option performance over the past 6 to 36 months are likely to experience high option returns in the subsequent month.

Reference [2] extended this line of research to focus on intraday options returns. The authors pointed out,

In this paper, we uncover novel seasonal patterns in intraday returns on individual stock option straddles. These returns display the same persistent seasonality pattern as those of their underlying stock, even though straddles are delta-neutral. We find straddle return in a given half-hour interval today to positively predicts the return in the same intraday interval tomorrow, especially at the market open and close. These two momentum patterns are driven by different economic forces. While the morning momentum reflects investors’ underreaction to volatility shocks, afternoon momentum is driven by persistent inventory management by option market makers.

Subscribe to newsletter https://harbourfrontquant.beehiiv.com/subscribe Newsletter Covering Trading Strategies, Risk Management, Financial Derivatives, Career Perspectives, and More

In summary, it was shown that a straddle’s return during a particular 30-minute trading interval today positively predicts its return during the same interval on subsequent days. Morning momentum reflects a continued under-reaction to overnight volatility news. Afternoon momentum, on the other hand, is attributed to persistent price pressure caused by inventory management from option market makers.

Two important observations were made:

  • First, it remains unclear whether the delta-neutral straddles are dynamically rehedged after the trade is initiated throughout the day to maintain neutrality,
  • Second, while Reference [1] argued that option momentum is a distinct factor unrelated to stock momentum, the authors of Reference [2] linked morning momentum in options to the underlying stock momentum, suggesting a connection between the two.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Heston, Steven L. and Jones, Christopher S. and Khorram, Mehdi and Li, Shuaiqi and Mo, Haitao,  Option Momentum (2022). https://ssrn.com/abstract=4113680

[2] Da, Zhi and Goyenko, Ruslan and Zhang, Chengyu, Intraday Option Return: A Tale of Two Momentum (2024). https://ssrn.com/abstract=5018430

Further questions

What's your question? Ask it in the discussion forum

Have an answer to the questions below? Post it here or in the forum

LATEST NEWSStocks skid, bonds rally as tariff clock ticks down
Stocks skid, bonds rally as tariff clock ticks down
Stay up-to-date with the latest news - click here
LATEST NEWSBOC Aviation to buy 120 Boeing and Airbus aircraft
BOC Aviation to buy 120 Boeing and Airbus aircraft
Stay up-to-date with the latest news - click here
LATEST NEWSHundreds of thousands of eastern Canadians face power outages due to ice storm
Hundreds of thousands of eastern Canadians face power outages due to ice storm
Stay up-to-date with the latest news - click here
LATEST NEWSAuckland airport cuts passenger charges after watchdog's criticism
Auckland airport cuts passenger charges after watchdog's criticism
Stay up-to-date with the latest news - click here
LATEST NEWSAsia Braces for Historic Test of Export Model From Trump Tariffs
Asia Braces for Historic Test of Export Model From Trump Tariffs

Asian leaders face tough decisions as President Donald Trump’s reciprocal tariffs pose a generational challenge to a region whose economies were built around exports to the US and a world of low trade barriers.

Stay up-to-date with the latest news - click here

Leave a Reply