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Trading in the Options Market around Financial Analysts’ Consensus Revisions

Published online by Cambridge University Press:  20 May 2014

Darren K. Hayunga  and
Peter P. Lung
Darren K. Hayunga
Affiliation:
[email protected], Terry College of Business, University of Georgia, 310 Herty Dr, Athens, GA 30602
Peter P. Lung
Affiliation:
[email protected], Daniels College of Business, University of Denver, 2101 S University Blvd, Denver, CO 80208.
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Abstract

This article investigates the options market around a revision in the financial analysts’ consensus recommendation. The results demonstrate that options investors trade in the correct direction of the upcoming revision approximately 3 days prior to the announcement. We find this behavior in option-implied prices, implied volatilities, and options trading volume. Tests confirm that the options market leads the stock market before the financial analysts’ revision. Moreover, using all firms with outstanding options, an out-of-sample analysis produces a profitable zero-cost trading strategy net of transaction costs based on the relative valuations between the synthetic and the underlying equity security.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 3 , June 2014 , pp. 725 - 747
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2014 

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