It seems like a really strange result to me. If I understand correctly, they only consider long straddles that are dynamically delta-hedged. If that is the case, the result is basically that there is momentum in higher realized vol than implied for individual stocks. Is that a correct understanding? I only read your post, not the article.
yes, if RV-IV is high for a given stock, then it continues to remain high, both in timeseries and cross sectional (compared to another stock). What I find strange here is the authors claim that the option momentum is a different factor, separate from the underlying stock factors. IMO, delta hedging adds value only when the stock is in a mean reverting regime. hence momentum in options PnL is related to the regime in the underlying stock.
I posted a summary of an article on LI that supports the idea that momentum in options PnL relates to that of the underlying stock. I'll repost here shortly
It seems like a really strange result to me. If I understand correctly, they only consider long straddles that are dynamically delta-hedged. If that is the case, the result is basically that there is momentum in higher realized vol than implied for individual stocks. Is that a correct understanding? I only read your post, not the article.
yes, if RV-IV is high for a given stock, then it continues to remain high, both in timeseries and cross sectional (compared to another stock). What I find strange here is the authors claim that the option momentum is a different factor, separate from the underlying stock factors. IMO, delta hedging adds value only when the stock is in a mean reverting regime. hence momentum in options PnL is related to the regime in the underlying stock.
I agree. It is worth examining whether there is actually momentum in RV - IV. I never would have imagined that myself :-)
I posted a summary of an article on LI that supports the idea that momentum in options PnL relates to that of the underlying stock. I'll repost here shortly