mad money and smart money: the discrepancy of rationality between options and equity markets
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Mad Money and Smart Money: The Discrepancy of Rationalitybetween Options and Equity Markets
PresentedBy
Carl R. Chen – University of Dayton
I. Introduction
We examine the impact of analyst’s recommendations on stocks and options
Different reactions to the recommendations could distinguish trader types in these two markets
We focus on the recommendations made by the popular CNBC Mad Money show hosted by Jim Cramer
• The show is aired every weekday @ 6:00 p.m.
• The show draws more than 398,000 viewers daily
Is this guy sexy?
Price Pressure vs. New Information
Price Pressure HypothesisPrice could temporarily diverge from true value due to uninformed shift in excess demand
New Information HypothesisPrice adjusts to new information permanently
Test both the stock and options markets response to the Cramer’s stock recommendations
Market that shows the price pressure effect is driven by the uninformed
II. Literature Stock Market
Engelberg et al. (2007) and Balcarcel & Chen (2007)
Motivation of Balcarcel & Chen Mad Money show produces a short-lived
price pressure effect on the stock market uninformed trading
Options Market? No work related to the Mad Money
effect there are literature related to the price
discovery function of the options market
Options price does not predict stock (spot) price
Stock Options: Stephan & Whaley (1990), Chan et al (1993), O’Connor et al (1999), Chan et al (2002)
Currency Options: Brenner et al (1996), Pan et al (1996)
Informed trades occur in the options market
Using Hasbrouck’s (1995) information share analysis, Chakravarty, Gulen, Mahyhew (2004) find that 17% of the price discovery occurs in the options market
Easley, O’Hara, Srinivas (1998), Pan, Poteshman (2003) use signed options volume to show that options markets contain information of the underlying asset price changes
Cao et al (2000): abnormal trading before takeover announcements
III. Data and Methodology Data
Final sample contains 368 buy and 358 sell recommendations for the months of August and September 2005
Daily stock returns are taken from CRSP Stock dividend yields are from COMPUSTAT Daily options data are obtained from the
Market Data Express (MDX) by CBOE To minimize the non-synchronous trading,
we match MDX underlying stock price with intraday bid-ask from Trade and Quote (TAQ)
We drop the observation when stock price in options data differs from CRSP by more than 0.5%
MethodologyA. Event Study Procedure
Rit=αi + βi Rmt + εit, t=-124,…, -5 ARit = Rit – (α`i + β`i Rmt) = ε`it, t = 1, 2,…,
30 2
1 1
1 N t
iti t t
CAR ARN
2 2
1 1 1
1( ) /
N t t
it iti t t t t
Z CAR AR VAR ARN
222 22
1 1
[ ( )] / ( )t t
it i mt m mt t t t
TVAR AR T R T R L VAR R
L
We also compute the average abnormal share turnover (ATO) and average abnormal bid-ask spread (ASPREAD) for each day follow the same procedure
In the revised version of the paper (in progress) We use three-factor model to compute the
abnormal returns We expand the sample to cover more than
1,000 recommendations
B. Implied Price Changes in the Options Market
1.The Sequential Approach Since
11
ˆ ˆ( , , )t s t t tS f O R
Implied volatility of the previous period serves as a proxy of t. Together with options premium Ot and Rt ,
we estimate the implied stock price backwardly using the Generalized Newton Method algorithm (see Chakravarty et al 2004). This is a direct measurement of the stock price embedded in options
( ; ; )t t t tO f S RWhere Rt represents other observable variables such as risk-free rate, options maturity, and strike price, then
2. The Option Boundary Approach This approach gauges the degree of
divergence between option-implied and actual stock price
American option boundary with market friction of Bodurtha and Courtadon (1986) is employed
This is a model-free estimate, but not a direct measure of stock price
With market frictions, the upper boundaries for American call and put are as follows:
(Pa + Sa – Xe-rt ) + (TX +TS +TP )≥ Cb - Tc
(Ca - Sbe-qt + X) + (TX +TS +TC)≥ Pb -Tp
S, P, C, X, r, q and t are stock price, put premium, call premium, strike price, risk-free rate, dividend yield, and time to maturity. Superscript « a » and « b » denore ask and bid of the quotes. T represents transaction cost for trading respective instruments.
• Sa ≥ Cb – Pa +Xe-rxt – (Tx+Ts+Tp+Tc) =L• Sb ≤ [Ca – Pb +X + (Tx+Ts+Tp+Tc)]/e-qt =H
• (L – Sa) distance between lower bound and the observed stock price• (Sb – H)e–qt distance between higher bound and observed stock price
Divergence= (Ca + Cb - Pa – Pb ) - (Sa + Sbe-qt ) + X(1+e-rt) A positive (negative) “Divergency”
indicates that the implied stock price is more likely to be larger (smaller) than the observed stock price.
|-------------------------------------*---------*--------------------------------------------| Low Sb Sa High |_______Divergence=0_______|
Low High |________Divergence<0_______|
LowHigh |_________ Divergence>0________|
3. Options data Three options maturities:
short: 10-30 days; Mid: 31-60 days; Long: 61-120 days
Three options moneyness OTM: =0.02~0.45; ATM: =0.45~0.55; ITM: =0.55~0.98
IV. Empirical ResultsTable 1: Summary Statistics
Panel A: Stocks of Buy Recommendations
Obs. Size
($mil) Stock
Spread Stock
Turnover Beta Call options Put options
Option Spread
IV Ratio
Option Volume
Option Volume
Ratio Option Spread
IV Ratio
Option Volume
Option Volume
Ratio Entire 368 16,455 0.10% 1.25% 1.39 30.25% 2.68 407 1.32% 29.71% 2.85 239 0.89% Small 91 933 0.16% 2.02% 2.24 35.29% 3.71 112 1.56% 36.58% 3.98 69 1.03% Med 130 4,644 0.09% 1.20% 1.33 30.51% 2.56 181 1.09% 31.62% 2.73 117 0.81% Large 147 36,510 0.06% 0.82% 0.91 26.89% 2.15 789 1.38% 23.84% 2.26 449 0.88%
Panel B: Stocks of Sell Recommendations
Obs. Size
($mil) Stock
Spread Stock
Turnover Beta Call options Put options
Option Spread IV
Option Volume
Volume Ratio
Option Spread IV
Option Volume
Volume Ratio
Entire 358 10,825 0.12% 1.49% 1.71 36.32% 3.19 300 1.30% 32.82% 3.37 204 0.97% Small 152 828 0.16% 2.03% 2.35 40.22% 4.03 148 1.49% 36.15% 4.25 96 1.09% Med 118 3,799 0.10% 1.35% 1.47 34.41% 2.88 268 1.16% 32.57% 3.05 172 0.88% Large 88 37,516 0.07% 0.77% 0.92 32.16% 2.16 607 1.16% 27.43% 2.28 431 0.86%
Table 2: Summary Statistics of the Options DataPanel A – Call Options for the Buy Recommendations
Buy Recommendations
Moneyness Maturity Obs. size
($mil) Option spread
IV ratio
Option Volume
Volume Ratio
Stock Spread
Stock Turnover
Small-Cap OTM Short 85 951 92.91% 3.95 146 1.97% 0.15% 1.97%
Mid 90 918 76.95% 3.78 120 1.86% 0.16% 1.98% Long 91 928 51.16% 3.47 69 1.29% 0.15% 2.02% ATM Short 85 921 27.00% 3.63 219 2.46% 0.16% 2.15% Mid 90 930 19.53% 3.59 124 1.67% 0.15% 1.91% Long 91 939 14.71% 3.51 77 1.25% 0.15% 1.96% ITM Short 85 940 15.28% 3.78 121 1.54% 0.17% 2.07% Mid 89 932 12.29% 3.89 88 1.25% 0.17% 2.06% Long 90 939 9.27% 3.82 55 0.79% 0.16% 2.09%
Mid-Cap OTM Short 122 4,713 95.45% 2.78 259 1.35% 0.09% 1.23% Mid 127 4,629 73.88% 2.53 210 1.23% 0.10% 1.16% Long 127 4,619 41.32% 2.33 107 0.73% 0.09% 1.18% ATM Short 123 4,677 20.20% 2.39 339 1.90% 0.10% 1.21% Mid 125 4,645 13.43% 2.43 213 1.33% 0.09% 1.20% Long 126 4,643 10.02% 2.40 119 0.83% 0.09% 1.20% ITM Short 127 4,641 9.73% 2.74 162 0.93% 0.09% 1.20% Mid 129 4,609 7.48% 2.71 148 0.94% 0.09% 1.21% Long 130 4,625 5.85% 2.69 84 0.63% 0.09% 1.24%
Large-Cap OTM Short 145 36,568 88.84% 2.16 1,206 1.95% 0.06% 0.82% Mid 146 36,352 69.37% 2.05 943 1.60% 0.06% 0.81% Long 147 36,205 40.79% 1.95 461 0.81% 0.06% 0.81% ATM Short 142 37,239 12.66% 1.93 1,379 2.40% 0.06% 0.85% Mid 146 36,465 9.13% 2.02 1,002 1.61% 0.06% 0.83% Long 147 36,252 6.69% 2.02 454 0.89% 0.06% 0.82% ITM Short 144 36,798 5.99% 2.47 823 1.68% 0.06% 0.81% Mid 146 36,407 4.74% 2.38 570 0.89% 0.06% 0.83% Long 147 36,332 3.72% 2.34 287 0.63% 0.06% 0.83%
Table 2: Panel B – Call Options for Sell Recommendations
Sell Recommendations
Moneyness Maturity Obs. size
($mil) Option spread IV
Option Volume
Volume Ratio
Stock Spread
Stock Turnover
Small-
Cap OTM Short 132 830 96.05% 4.31 184 1.95% 0.16% 2.13% Mid 149 823 89.80% 4.20 144 1.60% 0.16% 2.03% Long 152 829 65.67% 3.82 122 1.11% 0.16% 1.99% ATM Short 135 792 31.16% 3.88 262 2.49% 0.15% 1.93% Mid 146 830 22.63% 3.90 175 1.82% 0.16% 1.89% Long 149 832 16.53% 3.80 131 1.15% 0.16% 1.97% ITM Short 134 841 17.77% 4.16 141 1.43% 0.16% 2.01% Mid 143 832 12.68% 4.12 94 1.13% 0.16% 2.08% Long 147 840 10.58% 4.09 86 0.85% 0.16% 2.20%
Mid-Cap OTM Short 109 3,850 93.80% 3.15 455 1.78% 0.10% 1.39%
Mid 118 3,774 82.95% 2.92 298 1.28% 0.10% 1.32% Long 117 3,804 57.18% 2.68 172 0.81% 0.11% 1.30% ATM Short 104 3,777 22.32% 2.68 467 1.89% 0.11% 1.41% Mid 111 3,758 15.89% 2.76 350 1.51% 0.09% 1.33% Long 117 3,761 11.29% 2.69 174 0.86% 0.10% 1.34% ITM Short 112 3,855 11.96% 3.00 244 1.11% 0.09% 1.32% Mid 116 3,810 8.36% 3.07 192 0.87% 0.10% 1.35% Long 118 3,801 6.36% 3.00 95 0.46% 0.10% 1.36%
Large-Cap OTM Short 85 37,762 93.42% 2.22 847 1.87% 0.07% 0.77%
Mid 88 36,821 82.81% 2.12 793 1.49% 0.08% 0.76% Long 87 37,122 58.91% 1.98 433 0.81% 0.07% 0.77% ATM Short 78 39,409 16.19% 1.91 1,083 1.96% 0.06% 0.77% Mid 87 37,170 11.26% 2.01 759 1.39% 0.07% 0.78% Long 86 37,436 7.75% 2.02 373 0.67% 0.08% 0.77% ITM Short 85 37,813 7.49% 2.43 548 1.05% 0.08% 0.75% Mid 87 37,139 5.55% 2.39 463 0.79% 0.08% 0.77% Long 87 37,186 4.35% 2.36 212 0.48% 0.07% 0.78%
Table 2: Panel C – Put Options for Buy Recommendations Buy Recommendations
Moneyness Maturity Obs. size
($mil) Option spread IV
Option Volume
Volume Ratio
Stock Spread
Stock Turnover
Small-
Cap OTM Short 79 957 94.20% 4.47 101 1.86% 0.15% 2.36% Mid 86 926 84.16% 4.37 79 1.31% 0.15% 2.22% Long 90 961 57.78% 4.14 63 1.09% 0.18% 2.19% ATM Short 78 918 21.91% 3.83 105 1.23% 0.16% 2.48% Mid 87 919 18.45% 3.72 83 1.15% 0.14% 2.14% Long 85 934 12.29% 3.71 47 0.87% 0.16% 2.42% ITM Short 70 910 13.32% 3.89 71 0.79% 0.16% 2.52% Mid 82 943 11.59% 3.88 42 0.60% 0.15% 2.52% Long 72 933 7.52% 3.78 31 0.48% 0.13% 3.02%
Mid-Cap OTM Short 123 4,695 98.25% 3.25 202 1.25% 0.09% 1.27%
Mid 128 4,601 77.18% 3.07 170 1.22% 0.09% 1.22% Long 127 4,652 44.38% 2.86 103 0.79% 0.09% 1.25% ATM Short 119 4,718 18.12% 2.42 192 1.18% 0.09% 1.23% Mid 121 4,696 11.62% 2.50 116 0.74% 0.09% 1.28% Long 124 4,688 9.08% 2.48 66 0.52% 0.10% 1.32% ITM Short 119 4,786 9.07% 2.86 83 0.57% 0.09% 1.32% Mid 122 4,702 6.68% 2.64 76 0.67% 0.10% 1.29% Long 119 4,772 5.56% 2.48 41 0.32% 0.09% 1.37%
Large-Cap OTM Short 143 37,005 77.99% 2.57 930 1.68% 0.06% 0.82%
Mid 146 36,397 58.82% 2.51 760 1.48% 0.06% 0.83% Long 147 36,291 34.86% 2.47 374 0.84% 0.06% 0.83% ATM Short 142 37,029 13.12% 1.93 720 1.41% 0.06% 0.85% Mid 146 36,441 8.75% 2.04 499 0.85% 0.06% 0.84% Long 146 36,465 6.23% 2.06 179 0.39% 0.06% 0.85% ITM Short 144 36,742 6.37% 2.38 314 0.58% 0.06% 0.83% Mid 146 36,295 4.87% 2.25 199 0.38% 0.06% 0.84% Long 144 36,751 3.78% 2.10 76 0.17% 0.07% 0.84%
Table 2: Panel D – Put Options for Sell Recommendations Sell Recommendations
Moneyness Maturity Obs. sizz
($mil) Option spread IV
Option Volume
Volume Ratio
Stock Spread
Stock Turnover
Small-
Cap OTM Short 131 841 89.51% 4.72 155 1.65% 0.14% 2.16% Mid 141 837 79.12% 4.51 111 1.58% 0.15% 2.17% Long 149 839 54.72% 4.43 107 1.12% 0.17% 2.24% ATM Short 127 808 28.44% 4.04 111 1.22% 0.14% 2.15% Mid 142 821 19.42% 4.06 118 1.43% 0.17% 2.20% Long 143 827 13.82% 4.03 72 0.81% 0.16% 2.37% ITM Short 122 821 16.26% 4.12 82 0.78% 0.16% 2.53% Mid 137 836 12.63% 4.24 65 0.67% 0.16% 2.62% Long 131 846 8.52% 4.05 42 0.52% 0.16% 2.64%
Mid-Cap OTM Short 106 3,908 92.60% 3.43 286 1.52% 0.09% 1.42%
Mid 113 3,824 78.50% 3.45 266 1.26% 0.10% 1.42% Long 115 3,829 50.78% 3.20 150 0.86% 0.10% 1.35% ATM Short 100 3,756 22.08% 2.79 275 1.30% 0.10% 1.44% Mid 110 3,826 14.27% 2.82 215 0.98% 0.09% 1.37% Long 112 3,827 9.63% 2.78 96 0.60% 0.10% 1.40% ITM Short 102 3,907 10.21% 3.15 142 0.61% 0.10% 1.54% Mid 112 3,831 7.64% 2.98 83 0.51% 0.10% 1.46% Long 114 3,841 6.75% 2.81 56 0.35% 0.12% 1.56%
Large-Cap OTM Short 85 37,825 83.49% 2.53 631 1.56% 0.07% 0.75%
Mid 86 37,454 67.92% 2.56 727 1.41% 0.06% 0.76% Long 87 37,160 43.82% 2.49 381 0.75% 0.07% 0.78% ATM Short 78 39,350 15.84% 1.93 765 1.33% 0.07% 0.77% Mid 86 37,408 10.38% 2.05 479 0.92% 0.08% 0.79% Long 85 37,764 7.15% 2.07 234 0.46% 0.06% 0.80% ITM Short 85 37,799 7.47% 2.43 326 0.68% 0.06% 0.77% Mid 87 37,102 5.64% 2.30 222 0.43% 0.07% 0.78% Long 85 37,730 4.11% 2.15 147 0.28% 0.08% 0.80%
Table 3: The Price Pressure Effect (Stock Markets)
Buy Sell
Date AR% CAR% t(ATO) t(ASPREAD) AR% CAR% t(ATO) t(ASPREAD) All 1 0.41 0.41 0.11 0.11
(0.92) (0.92) 2.31 1.91 (1.07) (1.07) 2.26 0.87
2
0.15 (0.78)
0.55 (1.17) 1.29 0.14
-0.30 (-1.29)
-0.19 (-1.26) 0.69 -0.46
10
-0.29
(-1.73) -0.21
(-1.62) 0.47 1.09 0.17
(1.08) -0.77
(-1.41) 0.58 -0.74
30
-0.17
(-1.61) -2.54
(-2.08) 0.75 0.18 -0.30
(-1.27) -1.27
(-1.65) 0.11 0.24
Small-Cap 1
0.91 (2.15)
0.91 (2.15) 9.55 2.68
0.28 (1.21)
0.28 (1.21) 2.77 1.31
2
0.53 (1.91)
1.44 (2.83) 5.12 1.05
-0.74 (-1.59)
-0.46 (-1.30) 1.67 -0.55
10
-0.64
(-1.12) -0.21
(-0.69) 1.13 0.29 -0.20
(-1.03) -1.74
(-2.24) -1.55 -0.45
30
-0.12
(-0.97) -3.76
(-2.48) 0.71 -0.41 -0.07
(-0.15) -2.57
(-1.81) -0.16 0.22
Mid-Cap 1
0.03 (0.21)
0.03 (0.21) 2.91 0.54
0.08 (0.05)
0.08 (0.05) 1.41 -0.79
2
-0.20 (-0.39)
-0.17 (-1.32) 1.03 0.61
-0.10 (-0.11)
-0.02 (-0.63) 1.51 -0.70
10
-0.02
(-0.06) -0.08
(-0.55) 0.75 -0.18 0.04
(0.85) -0.54
(-1.09) 0.68 -0.62
30
-0.17
(-0.63)
-1.75 (-1.84) 1.26 -0.21
-0.11 (-0.61)
-0.61 (-0.81) 0.97 -0.62
Large-Cap 1
0.13 (1.01)
0.13 (1.01) 1.24 0.15
0.03 (0.23)
0.03 (0.23) 2.09 0.54
2 0.03
(0.98) 0.16
(1.24) 1.06 -0.22 -0.20
(-0.94) -0.17
(-0.61) 0.27 0.91
10 -0.14
(-0.87) -0.41
(-1.79) -0.41 0.71 -0.0
(-0.78) -0.38
(-1.05) 0.10 -0.14
30 -0.23
(-1.01) -1.38
(-1.76) 0.29 -0.13 0.01
(-0.21) -0.73
(-.128) 0.68 0.21
Table 4: The Price Pressure Effect (Options Markets)Panel A – Buy Recommendations
Only Days 1 is reported
Call^
tS Put^
tS Divergence AR t-stat AR t-stat AR t-stat
Small-Cap OTM Short 0.14 0.07 -0.2 -0.48 OTM call and ITM put -0.51 -2.78 Mid -0.07 -0.28 0.47 1.26 0.04 0.52 Long 0.28 1.33 0.07 0.34 -0.23 -0.94 ATM Short 0.63 1.47 -0.09 -0.24 ATM call and ATM put -0.07 -0.33 Mid -0.09 -0.36 -0.23 -1.26 -1.35 -1.71 Long -0.16 -0.41 0.22 1.42 0.23 1.02 ITM Short 0.17 0.55 -0.41 -1.61 ITM call and OTM put 1.33 0.99 Mid 0.28 0.98 0.05 0.19 -0.46 -1.65 Long 0.36 1.23 0.05 0.27 0.16 1.11
Mid-Cap OTM Short 0.32 1.6 -0.23 -0.75 OTM call and ITM put -0.03 -0.64 Mid -0.1 -0.64 0.17 0.98 -1.95 -1.09 Long -0.14 -0.92 0.43 1.38 0.18 0.87 ATM Short -0.44 -0.95 0.12 0.53 ATM call and ATM put 0.21 0.96 Mid -1.02 -1.14 0.67 1.33 -0.02 -0.17 Long -0.1 -0.6 0.22 1.28 0.71 0.88 ITM Short -0.08 -0.45 -0.04 -0.16 ITM call and OTM put -0.37 -0.91 Mid -0.29 -1.06 0.03 0.17 0.18 1.64 Long -0.32 -1.56 0.57 1.38 -0.11 -0.66
Large-Cap OTM Short -0.02 -0.08 -0.01 -0.05 OTM call and ITM put -1.59 -0.93 Mid 0.01 0.04 -0.16 -1.27 0.15 1.48 Long -0.02 -0.16 0.04 0.26 0.06 0.58 ATM Short 0.15 0.64 -0.13 -0.22 ATM call and ATM put -0.11 -0.7 Mid -0.06 -0.36 -0.03 -0.13 0.13 0.46 Long 0.06 0.34 0.06 0.49 0.01 0.15 ITM Short 0.04 0.28 -0.16 -0.96 ITM call and OTM put 0.17 0.8 Mid -0.08 -0.46 0.03 0.22 0.08 1.07 Long -0.07 -0.43 0.01 0.07 -0.03 -0.33
Synthetic Short stock
Table 4: The Price Pressure Effect (Options Markets)Panel B – Sell Recommendations
Call^
tS Put^
tS Divergence AR t-stat AR t-stat AR t-stat
Small-Cap OTM Short -0.31 -1.86 -0.43 -1.17 OTM call and ITM put -0.64 -2.25 Mid -0.03 -0.15 -0.47 -1.60 -0.35 -0.88 Long -0.04 -0.24 -0.17 -0.88 1.44 1.05 ATM Short -0.57 -1.73 -0.40 -1.61 ATM call and ATM put -0.18 -1.05 Mid -0.39 -1.41 -0.43 -1.37 -0.07 -0.39 Long -0.30 -1.41 -0.35 -1.00 0.16 0.82 ITM Short -0.37 -1.27 -0.46 -1.74 ITM call and OTM put -0.16 -0.95 Mid -0.55 -1.58 -0.05 -0.15 0.22 1.44 Long -0.50 -1.44 -0.35 -1.59 -0.09 -1.12
Mid-Cap OTM Short -0.21 -0.78 -0.06 -0.43 OTM call and ITM put -0.10 -0.51 Mid -0.24 -1.66 -0.07 -0.42 0.12 1.34 Long -0.11 -0.68 -0.06 -0.41 -0.04 -0.30 ATM Short -0.31 -0.40 -0.50 -0.83 ATM call and ATM put 0.21 1.38 Mid 0.27 0.91 -0.08 -0.30 -0.18 -1.73 Long -0.26 -1.45 0.20 1.06 -0.05 -0.36 ITM Short -0.09 -0.40 -0.51 -1.55 ITM call and OTM put -0.07 -0.21 Mid -0.35 -1.67 -0.07 -0.43 0.13 1.61 Long -0.30 -1.30 -0.08 -0.40 0.01 0.05
Large-Cap OTM Short -0.37 -1.51 0.12 0.60 OTM call and ITM put -0.86 -1.00 Mid -0.26 -1.50 -0.01 -0.08 -0.54 -0.95 Long -0.23 -1.35 0.18 1.00 -0.23 -1.08 ATM Short -0.07 -0.27 0.26 0.64 ATM call and ATM put 0.49 1.75 Mid -0.64 -1.28 -0.15 -0.93 -0.04 -0.51 Long -0.58 -1.12 0.08 0.65 -0.17 -1.60 ITM Short -0.59 -1.53 0.10 0.38 ITM call and OTM put 0.50 0.95 Mid -0.61 -1.64 0.11 1.08 -0.28 -1.20 Long -0.21 -1.18 -0.03 -0.16 -0.18 -1.75
Table 5: Correlations between Abnormal Stock Returns and Abnormal Implied Price Changes (day -124 ~ -5)
AR ^
tS from calls ^
tS from puts Divergence
AR 1 0.87 <0.001 0.83 <0.001 0.66 0.008 ^
tS from calls 1 0.91 <0.001 0.75 <0.001 ^
tS from puts 1 0.69 <0.001
Divergence 1
Table 6: Effect on Options TradingPanel A – Buy Recommendations
Call Options Put Options
ASPREAD t-stat ATO t-stat ASPREAD t-stat ATO t-stat Small-Cap OTM Short -0.12 -0.49 -0.03 -0.19 -0.16 -0.61 1.23 0.81
Mid -0.13 -0.65 0.26 0.97 0.42 0.9 -0.11 -0.46 Long 0.05 0.14 0.75 1.09 0.26 1.26 -0.18 -0.86 ATM Short 1.33 1.68 0.09 0.26 0.37 1.51 0.56 0.82 Mid -0.29 -1.92 -0.19 -1.14 -0.09 -0.43 0.02 0.08 Long -0.15 -0.99 0.28 0.92 0.35 1.49 0.14 0.5 ITM Short -0.07 -0.19 -0.17 -0.98 -0.73 -2.67 0.86 2.17 Mid -0.3 -1.5 -0.19 -1.6 -0.04 -0.16 0.1 0.44 Long -0.24 -1.36 0.73 1.12 0.07 0.29 -0.18 -1.69
Mid-Cap OTM Short -0.11 -0.64 0.18 0.91 0.04 0.14 1.94 1.3 Mid -0.17 -1.31 2.22 1 0.13 0.94 -0.2 -1.41 Long -0.23 -1.71 0.15 0.74 -0.08 -0.43 0.27 0.88 ATM Short -0.01 -0.05 0.33 1.08 -0.39 -1.57 0.35 0.89 Mid 0.99 0.77 -0.26 -1.42 -0.27 -1.61 0.14 0.65 Long -0.48 -1.43 0.29 1.46 -0.08 -0.6 -0.03 -0.21 ITM Short -0.35 -1.08 1.08 1.58 -0.43 -2.07 0.3 0.95 Mid -0.23 -1.64 0.16 0.82 -0.27 -1.84 0.08 0.57 Long -0.14 -0.96 0.3 0.71 -0.04 -0.24 -0.1 -1.06
Large-Cap OTM Short -0.03 -0.18 0.24 1.27 0.02 0.12 0.1 0.33 Mid -0.01 -0.05 0.18 0.82 -0.04 -0.42 -0.05 -0.61 Long 0.25 0.96 0.2 1.58 0.29 1.66 0.64 1.25 ATM Short 0.02 0.09 -0.31 -1.45 -0.16 -0.73 -0.36 -1.86 Mid 0.05 0.39 0.04 0.25 -0.11 -0.69 0.78 1.21 Long 0.09 0.42 1.01 1.26 0.14 0.42 0.2 0.98 ITM Short -0.21 -1.69 -0.02 -0.17 0 0 0.26 1.09 Mid 0.01 0.07 -0.03 -0.32 -0.19 -1.49 0.55 1.63 Long -0.25 -1.44 1.14 1.69 0.15 0.38 1.08 1.33
Table 6: Effect on Options TradingPanel B – Sell Recommendations
Call Options Put Options
ASPREAD t-stat ATO t-stat ASPREAD t-stat ATO t-stat Small-Cap OTM Short -0.11 -0.5 -0.06 -0.41 0.46 1.16 -0.3 -1.28
Mid 0.16 0.49 0.16 0.8 -0.11 -0.63 0.23 0.48 Long 0.38 1.43 0.29 0.93 0.36 0.98 0.02 0.11 ATM Short -0.51 -1.21 0.81 1.33 -0.11 -0.28 1.08 1.1 Mid -0.34 -1.75 0.07 0.43 -0.5 -1.69 0.73 1.68 Long 0.02 0.06 -0.07 -0.63 0.22 0.81 0.38 0.81 ITM Short 0.3 1.26 -0.21 -0.99 0.23 0.81 0.28 0.9 Mid 0.24 0.56 0.25 0.66 0.85 1.41 0 0.02 Long 0.06 0.18 -0.11 -1 0.7 1.91 1.17 1.41
Mid-Cap OTM Short -0.44 -1.07 0.16 0.44 -0.2 -0.63 -0.13 -0.93 Mid 0 -0.02 3.13 1.43 -0.32 -1.87 1.67 1.55 Long 0.13 0.79 1.06 1.81 0.26 1.09 1.3 1.79 ATM Short 0.04 0.06 0.23 0.58 -0.09 -0.26 1.78 1.22 Mid -0.31 -1.4 0.26 0.53 -0.02 -0.06 1.11 0.95 Long 0.06 0.22 1.44 1.29 -0.02 -0.1 0.4 1.55 ITM Short -0.19 -0.29 1.06 1.11 -0.21 -0.79 0.58 1.06 Mid -0.05 -0.35 0.38 0.74 0.08 0.35 0.04 0.17 Long 0.11 0.62 1.06 1 -0.07 -0.44 0.47 1.28
Large-Cap OTM Short 0.29 0.93 0.88 1.63 0.11 0.61 0.17 0.74 Mid -0.07 -0.33 0.15 1.06 -0.35 -1.3 0.11 0.45 Long 0.14 1.28 0.44 1.23 0.43 1.7 0.56 1.56 ATM Short -0.2 -0.35 0.8 1.52 -0.08 -0.23 1.2 0.97 Mid 0.57 1.64 -0.19 -1.06 -0.5 -1.69 0.24 0.59 Long -0.06 -0.35 0.03 0.1 0.13 0.3 -0.22 -1.77 ITM Short -0.22 -0.88 0.08 0.27 -0.15 -0.59 -0.28 -1.56 Mid 0.27 1.13 -0.19 -1.09 0.02 0.1 0.02 0.08 Long -0.18 -1.21 0.16 0.74 -0.12 -0.71 -0.02 -0.11
Table 7: Trading Profit (Long Short-term Puts)
Speculation (buy put options and hold till maturity) Non-event period (%) t-stat Event period (%) t-stat Difference (%) t-stat
OTM -41.69 -4.31 -10.26 -2.22 31.43 4.25 ATM -18.31 -3.78 11.75 2.71 30.06 3.62 ITM -11.85 -2.92 26.24 3.13 38.09 5.08
Rt = (Vt – Ot)/Ot
Day -125 ~ -30
Buy a day after recommendation
Modified Johnson t-test
In the revised version where longer data period is employed, we find most of the profit opportunity disappeared in the latter period.
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V. Conclusions Small-cap stocks show a short-lived price run-up
followed by a price reversal for the stocks Cramer recommended to buy evidence of uninformed trading
Options markets largely lack such price pressure effect informed trading Short-term ITM put options react counter the buy
recommendations. Bid-ask spreads decreased and trading increased Take advantage of naïve trading in the spot markets.
Buy short-term puts generate high profits during the event periods. ITM puts generate the highest returns.
Longer data period and different market model are employed in the revision. Results are not materially changed. There is evidence that market learns.
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