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The Journal of Alternative Investments

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Article

Option Informed Stock Picking

Edward Szado, Hossein Kazemi and Thomas Schneeweis
The Journal of Alternative Investments Summer 2018, jai.2018.1.063; DOI: https://doi.org/10.3905/jai.2018.1.063
Edward Szado
is an associate professor of finance at Providence College in Providence, RI
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Hossein Kazemi
is a professor of finance and director of CISDM at the Isenberg School of Management, University of Massachusetts in Amherst, MA.
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Thomas Schneeweis
is a professor emeritus at the Isenberg School of Management, University of Massachusetts in Amherst, MA.
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Abstract

A wide range of research has suggested that informed trading in options markets may effectively signal subsequent changes in equity prices. In this article, the authors analyze the performance of long/short strategies based on a number of signals from options markets. In addition, they create an easily implemented long-only strategy based on a subset of the signals (volatility risk premium, option/stock volume ratio, implied volatility skew, and realized volatility). In order to minimize transaction costs and liquidity issues, they restrict their analysis to S&P 500 constituents, rebalance the portfolio monthly, and limit the holdings to 50 individual stocks. The analysis of the period from 1996 through mid-2015 shows significant outperformance of a long-only, equal-weighted portfolio of 50 stocks (and found similar results when considering 10-stock portfolios), relative to the S&P 500 and the equal-weighted S&P 500. A return attribution analysis confirms that the outperformance is provided by individual stock selection rather than sector selection.

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The Journal of Alternative Investments: 23 (3)
The Journal of Alternative Investments
Vol. 23, Issue 3
Winter 2021
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Option Informed Stock Picking
Edward Szado, Hossein Kazemi, Thomas Schneeweis
The Journal of Alternative Investments Jun 2018, jai.2018.1.063; DOI: 10.3905/jai.2018.1.063

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Option Informed Stock Picking
Edward Szado, Hossein Kazemi, Thomas Schneeweis
The Journal of Alternative Investments Jun 2018, jai.2018.1.063; DOI: 10.3905/jai.2018.1.063
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  • Article
    • Abstract
    • LITERATURE REVIEW
    • DATA AND METHODOLOGY
    • EMPIRICAL RESULTS
    • PERFORMANCE ATTRIBUTION
    • STOCK SELECTION ANALYSIS
    • CONCLUSIONS
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