Momentum has been studied extensively across equities, commodities, and other asset classes, with well-documented evidence of cross-sectional and time-series continuation effects. More recently, an emerging line of research has shifted attention to momentum in option returns, examining whether derivative markets exhibit their own systematic return patterns.
In this post, we review the latest evidence on option return momentum across both monthly and intraday horizons and assess the economic mechanisms that may explain these persistent dynamics.
Momentum in the Option Market
In the financial market, momentum is the tendency for assets to continue moving in the same direction. It is a reflection of the underlying strength or weakness of an asset’s price action and can be used to identify trends. Momentum is one of the most pervasive market phenomena and can be observed in nearly all stock markets around the world.
Does this anomaly exist in other asset classes?
Reference [1] studied momentum in the options market. It examined the returns of delta-neutral straddles on individual equities.
Findings
-The study finds strong evidence of momentum in option returns, as options that performed well over the previous 6 to 36 months tend to generate high returns in the subsequent month.
-Momentum is observed under both cross-sectional and time-series definitions of past performance.
-The strategy is profitable across all five-year subsamples and carries significantly lower risk than short straddle positions on the S&P 500 Index or individual stocks.
-There is no evidence of momentum crashes in option returns, although the sample length may limit detection of such events.
-The authors find limited evidence of short-term cross-sectional reversal, where options that outperform in one month may underperform in the following month.
-There is no evidence of long-run reversal in option returns, in contrast to equities, and momentum persists even at 2- to 3-year horizons.
-Option momentum differs from stock momentum because the results are based on delta-hedged positions and remain robust after controlling for stock momentum effects.
-Momentum profits are unaffected by controls for implied versus historical volatility and other option characteristics, and remain significant after factor risk adjustments.
-The study shows that high historical-return options significantly outperform low-return options across multiple horizons, including when using out-of-the-money options or delta-hedged returns.
In short, like in equities, options also exhibit momentum. The options momentum is mean-reverting in the short term and trending in the long term.
Reference
[1] Heston, Steven L. and Jones, Christopher S. and Khorram, Mehdi and Li, Shuaiqi and Mo, Haitao, Option Momentum (2022), SSRN 4113680
Momentum in the Option Market, Intraday Case
While the previous article examines momentum in option returns across monthly horizons, Reference [2] extends this line of research by focusing on intraday option return dynamics.
Findings
-The paper documents novel seasonal patterns in intraday returns of individual stock option straddles.
-Despite being delta-neutral, straddle returns exhibit the same persistent intraday seasonality as their underlying stocks.
-Returns in a given half-hour interval predict returns in the same interval on the following trading day.
-This continuation effect is strongest at the market open and close, referred to as morning and afternoon momentum.
-Morning momentum is attributed to investors’ underreaction to volatility shocks.
-Afternoon momentum is driven by persistent inventory management behavior by option market makers.
In summary, it was shown that a straddle’s return during a particular 30-minute trading interval today positively predicts its return during the same interval on subsequent days. Morning momentum reflects a continued under-reaction to overnight volatility news. Afternoon momentum, on the other hand, is attributed to persistent price pressure caused by inventory management from option market makers.
Reference
[2] Da, Zhi and Goyenko, Ruslan and Zhang, Chengyu, Intraday Option Return: A Tale of Two Momentum (2024), SSRN 5018430
Closing Thoughts
Taken together, these studies show that option markets exhibit systematic return patterns across both monthly and intraday horizons. Momentum persists over 6 to 36 months without the long-run reversals observed in equities, while intraday straddle returns display predictable continuation at the market open and close.
The evidence suggests that option return dynamics are driven by distinct forces, including behavioral underreaction, inventory management by market makers, and structural features of volatility trading. Collectively, these findings reinforce the view that options are not merely derivatives of stocks, but markets with their own persistent and economically meaningful return patterns.