Momentum in the Option Market, Intraday Case
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.
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.
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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
Wow! Cool!