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S. Warkulat, M. Pelster, and G. Weiss: Sentiment and the Equity Options Market

June 24, 2025

We show that firm-specific social media sentiment can predict the crosssection of delta-hedged call option returns. A long-short strategy that buys calls with the least positive stock sentiment and shorts calls with the most positive sentiment earns significant abnormal returns. A 1% increase in positive sentiment leads to a 7.31% p.a. decrease in call option returns. Social media sentiment is distinct from news sentiment and other established determinants of option returns. The impact of sentiment on call option returns is larger for smaller firms, compared to larger firms, and more pronounced in recent years, in line with the observation that retail investors increasingly engage in the (call) option market.

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