@article {Szado48, author = {Edward Szado and Hossein Kazemi and Thomas Schneeweis}, title = {Option Informed Stock Picking}, volume = {21}, number = {1}, pages = {48--66}, year = {2018}, doi = {10.3905/jai.2018.1.063}, publisher = {Institutional Investor Journals Umbrella}, 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.TOPICS: Security analysis and valuation, options, statistical methods, performance measurement}, issn = {1520-3255}, URL = {https://jai.pm-research.com/content/21/1/48}, eprint = {https://jai.pm-research.com/content/21/1/48.full.pdf}, journal = {The Journal of Alternative Investments} }