Exploiting Option Information in the Equity Market

Public option market information contains exploitable information for equity investors for an investable universe of liquid large-cap stocks. Strategies based on several option measures predict returns and alphas on the underlying stock. Transaction costs are an important factor given the high turnover of these strategies, but significant net alphas can be obtained when using a simple approach that reduces transaction costs. These findings suggest that information diffuses gradually from the option market into the underlying stock market.