Option Momentum

This paper investigates the performance of option investments across different stocks by computing monthly returns on at-the-money straddles on individual equities. It finds that options with high historical returns continue to significantly outperform options with low historical returns over horizons ranging from 6 to 36 months. This phenomenon is robust to including out-of-the-money options or delta-hedging the returns. Unlike stock momentum, option return continuation is not followed by long-run reversal. Significant returns remain after factor risk adjustment and after controlling for implied volatility and other characteristics. Across stocks, trading costs are unrelated to the magnitude of momentum profits