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J. Wei, S. K. Choy, and H. Zhang: December Effect in Option Returns

March 7, 2025

This paper uncovers a December effect in option returns: The delta-hedged returns of options on both stocks and the S&P 500 index are substantially lower in December than in other months. Options are overvalued at the beginning of December due to option investors’ failure in anticipating the abnormally low volatility in the second half of December resulting from light trading of stocks during the festive Christmas holiday season. A trading strategy taking a short position in straddles at the beginning of December and closing the position at the month-end can generate a hedged return of 13.09% with a t-value of 6.70, compared with the unconditional sample mean of 0.88%. This paper is the first in the literature to uncover this December effect in option returns.

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