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G. Baltussen et al., “Exploiting Option Information in the Equity Market,” (December 31, 2011). Financial Analysts Journal, Forthcoming.

G. Baltussen et al., “Exploiting Option Information in the Equity Market,” (December 31, 2011). Financial Analysts Journal, Forthcoming.

Abstract:

Public option market information contains exploitable information for equity investors for an investable universe of liquid large-cap stocks. Strategies based on several option measures predict returns and alphas on the underlying stock. Transaction costs are an important factor given the high turnover of these strategies, but significant net alphas can be obtained when using a simple transaction cost reducing approach. These findings suggest that information diffuses from the option market into the underlying stock market.