R. Goyenko and C. Zhang: Option Returns: Closing Prices are not What You Pay

November 18, 2019

We document that end-of-day equity and index options quoted bid-ask mid-points which are widely used to compute option returns, implied volatilities, and greeks, do not accurately represent trading prices for a day. Delta-hedged option returns computed using these mid-quotes are systematically higher compared to those using any other mid-quote during a day. These differences, which can reach up to 1% per day, are attributed to dynamics of option net order flows, and option market makers inventory position management.