Do Options Exhibit Momentum?

Why It Matters

Option momentum provides a distinct, exploitable alpha source separate from equity momentum, reshaping how quantitative traders price and hedge derivatives.

Key Takeaways

• Option returns show 6‑36 month momentum.
• Momentum persists without long‑run reversal.
• Intraday straddles repeat returns at market open/close.
• Morning momentum linked to volatility underreaction.
• Afternoon momentum driven by market‑maker inventory.

Pulse Analysis

The discovery of sustained momentum in option returns challenges the conventional view that derivatives merely mirror their underlying equities. By focusing on delta‑neutral straddles, researchers isolate pure volatility exposure and uncover a cross‑sectional premium that endures over multi‑year horizons. Unlike stock momentum, which often reverses after two to three years, option momentum remains positive, offering a more stable risk‑adjusted return profile. This divergence suggests that volatility risk carries its own behavioral drivers, prompting asset managers to reconsider factor models that traditionally exclude derivative‑specific signals.

Intraday analyses add another layer of nuance, revealing that option straddles exhibit repeatable patterns within 30‑minute intervals. The strongest continuations occur at the market open, where traders underreact to overnight volatility shocks, and at the close, where market makers adjust inventories to balance supply and demand. These micro‑structural forces generate predictable short‑term returns that can be harvested through high‑frequency strategies, provided execution costs remain low. Understanding the timing of these effects is crucial for algorithmic traders seeking to exploit fleeting price pressure without incurring excessive slippage.

For practitioners, the combined monthly and intraday momentum signals open new avenues for alpha generation and risk mitigation. Incorporating option‑specific momentum into portfolio construction can enhance diversification, as the factor behaves independently of equity trends. Moreover, delta‑hedged strategies that capture this premium may reduce exposure to directional market moves while capitalizing on volatility dynamics. As the academic literature expands, we can expect refined models that integrate option momentum with other derivative‑based factors, offering a richer toolkit for quantitative investors navigating increasingly complex markets.