Electronic copy available at: http://ssrn.

com/abstract=1571786
Stock Returns during Option Expiration Weeks
and the Option-Stock Volume Ratio
1
Chris Stivers
Terry College of Business
University of Georgia
Athens, GA 30602
Licheng Sun
Department of Finance
College of Business
Old Dominion University
Norfolk, VA 23529
This version: March 15, 2010
1
Comments welcome. Please address comments to Chris Stivers (e-mail: cstivers@terry.uga.edu; phone:
(706) 542-3648) or to Licheng Sun (e-mail: LSun@odu.edu; phone: (757) 683-6552).
Electronic copy available at: http://ssrn.com/abstract=1571786
Stock Returns during Option Expiration Weeks and
the Option-Stock Volume Ratio
Abstract
Over 1983 to 2008, we nd that large-cap stocks with actively traded options tend to have
substantially higher average weekly returns during option-expiration weeks (ending on a months
third-Friday), with consistent subperiod results. This empirical regularity is also evident in large-
cap-dominated stock portfolios. Further, over the 1996 to 2008 period with available Option Metrics
data, we nd that the average weekly stock returns for option-expiration weeks tend to be apprecia-
bly larger for option-expiration weeks that also experience a relatively high option trading volume,
relative to the underlying stock trading volume. In contrast, the average weekly returns for the
option-expiration week are not much dierent than other weeks for smaller-cap stock portfolios,
which contain stocks with relatively less option trading activity. Further, for our sample of large-cap
stocks, the average weekly stock returns for the third-Friday of a calendar month are not dierent
than other weeks for a pre-option-market sample over 1948 to 1972. We provide additional evidence
that, along with the option market evidence in Lakonishok, Lee, Pearson, and Poteshman (2007),
suggests that the sizable written call activity from non-market makers may contribute towards
understanding our empirical ndings.
JEL Classication: G12, G13, G14
Keywords: Option Expiration, Stock Returns, Option and Stock Trading Volume
Electronic copy available at: http://ssrn.com/abstract=1571786
1. Introduction
The past three decades have experienced a dramatic growth in the size of the options market.
According to the Chicago Board Options Exchange (CBOE), in 2007 CBOE options contract
volume reached an all-time record of 944,471,924 contracts. The growth rates in CBOE options
contract volume were 33%, 44%, and 40% in 2005, 2006, and 2007 respectively.
1
Further, recent
research indicates that option-related activity may have an inuence on the underlying stock price
behavior (Ni, Pearson, and Poteshman (2005)), or may contain information about the subsequent
behavior of stock prices (Roll, Schwartz, and Subrahmanyam (2010)). Ni, Pearson, and Poteshman
(2005) document that the closing prices of optionable stocks tend to cluster at option strike prices
on option-expiration days. They attribute the pricing patterns to hedge rebalancing by option
market makers and stock price manipulation by rm proprietary traders.
Given the tremendous growth in option trading activities and this recent research, this paper
re-examines the behavior of stock returns during option-expiration weeks. A few older studies
examine stock returns around the expiration day with return horizons beyond the actual expiration
day. Klemkosky (1978) analyzes weekly stock returns before and after option expiration for a
limited sample of 14 expiration periods in 1975 and 1976. He nds that 12 of the 14 expiration
weeks have negative returns (10 of the 14 weeks are signicantly negative) with an average return
of about 1% in the expiration week. The returns in the week after option expiration are largely
positive with an average return of 0.4%. Using a longer sample from January 1979 to June 1985,
Cinar and Vu (1987) examine the eect of option expiration on six large-cap stocks (IBM, GM,
Eastman Kodak, 3M, Sears and Exxon). They nd that the mean returns of these stocks during
the expiration weeks are mostly statistically indistinguishable from zero.
2
Mayhew (2000) surveys
the empirical evidence on expiration-day eects and concludes that although there appear to have
been specic instances of price movements on expiration days that appear to have been related to
1
See the website http://cboe.com/AboutCBOE/History.aspx.
2
Other studies examine option-expiration eects on the expiration day or the end of the expiration day. For
example, Stoll and Whaley (1987, 1991) look at expiration-day eects by focusing exclusively on the trading activity
during the last hour of trading on triple-witching days (days on which index futures, index options and options on
index futures expire simultaneously) and rst half-hour of the following day.
1
traders unwinding their positions, there is little evidence of a strong, systematic price eect around
expiration.
With the huge growth in option trading activities in recent years and the much longer time-series
now available, these earlier studies seem both outdated and limited in their scope. In this article, we
re-examine stock returns over option-expiration weeks for both large individual stocks and various
stock indices. We focus on the weekly returns of large individual rms that have actively traded
options over the 1996 to 2008 period, corresponding to option-volume data availability from Option
Metrics. However, our study also examines a longer 1983 to 2008 period (with 1983 coinciding with
the introduction of stock index options) and a pre-option-market period over 1948 to 1972.
This article is also the rst to examine whether the relative trading activity in options has a
role in understanding the return patterns during option expiration weeks. We follow from Roll,
Schwartz, and Subrahmanyam (2010), hereafter RSS, and examine the ratio of option trading vol-
ume to stock trading volume, or O/S. RSS study the time-series properties and cross-sectional
determinants of the O/S ratio. Their ndings include that the O/S tends to be higher around earn-
ings announcements and that the O/S ratio is positively related to the absolute post-announcement
returns.
The intuition behind examining the O/S ratio is simple. If weekly returns appear to behave
dierently during the option-expiration week (in contrast to the other weeks) and the behavior is
tied to option-related activity, then it seems likely that the associated patterns would be stronger
during option-expiration weeks that experience a relative large O/S. Accordingly, we also separately
examine the mean and volatility of returns for option-expiration weeks that have a relatively high
O/S value.
3
In stark contrast to earlier studies, we present striking new empirical evidence that average
stock returns tend to be higher during option-expiration weeks as compared to average returns in
other weeks, at least for large-cap stocks with very active option trading. First, for our primary
sample of 28 large-cap individual stocks with active option activity over 1996 to 2008, the average
3
We use a weekly O/S, dened as the average of the option trading volume for the ve trading days concluding in
the last day of the calendar week (normally Friday) divided by the comparable average of stock trading volume over
the same ve trading days.
2
weekly return during option-expiration weeks is 45.0 basis points. In contrast, for the other weeks,
the average weekly return is only 11.8 basis points. This spread in means tends to be larger for
the stocks with more actively traded options. We note that the average return volatility for the
option-expiration weeks is only modestly higher than the return volatility of the other weeks, at
4.97% versus 4.57%. One-half subperiod results are consistent.
Second, for the same sample of 28 stocks over 1996 to 2008, we examine the option-expiration
weeks where the O/S volume ratio is relatively high (above the 75
th
percentile value of the O/S
ratio for each respective stock). For our sample of large individual stocks, about 7.5% of the weeks
meet the double conditioning of being an option-expiration week with a high O/S value. We nd
that the spread in means is even more dramatic. For the option-expiration weeks with a high O/S,
the average weekly return is 82.5 basis points. For the remaining 92.5% of the weeks, the average
weekly stock return is only 14.0 basis points. We note that the average return volatility for the
option-expiration weeks with a high O/S is only modestly higher than the return volatility of the
other weeks, at 4.87% versus 4.64%. One-half subperiod results are again consistent.
Third, given the above patterns in the mean and volatility of the weekly stock returns, the
Sharpe ratio during the option-expiration weeks is much higher than the Sharpe ratio during the
other weeks. When examining all the option-expiration weeks, the average Sharpe ratio for the
option-expiration weeks is 0.57 versus an average Sharpe ratio of 0.07 for the other weeks.
4
When
examining the option-expiration weeks that also experienced a relatively high O/S ratio, the average
Sharpe ratio for the high O/S option-expiration weeks is 1.25 versus an average Sharpe ratio of
0.11 for the other weeks.
Fourth, we examine the same set of 28 rms in the earlier 1983 to 1995 period and nd quali-
tatively consistent results for the dierence in means, as related to the option expiration week. We
do not examine the O/S results in this earlier period, since the Option Metrics data begins in 1996.
Fifth, for stock indices, we examine the S&P 500 and size-based decile stock portfolios. Over
1983 to 2008, the option-expiration spreads in means for the S&P 500 and the large-cap stock
portfolio are positive and statistically signicant. However, the option-expiration spread in means
4
For these Sharpe ratios, we annualize the weekly return statistics by multiplying the mean excess return by 52
and multiply the sample standard deviation by the square root of 52.
3
is much smaller and statistically insignicant for the smaller-cap portfolios, presumably portfolios
composed of stocks with relatively much lower option activity.
Sixth, we examine our sample of large individual stocks over an earlier pre-option-market period
of comparable length, 1948 to 1972. For the 15 rms with available return history over the entire
earlier period, we nd essentially no spread in means between the third-Friday weeks and other
weeks. The average spread in means between the third-Friday weeks and other weeks is only 0.4
basis points and none of the spreads are statistically signicant. The same result holds for the S&P
500 index in the pre-1983 sample (preceding index option trading).
We also discuss possible explanations for these return patterns and present related evidence in
Section 6. The dramatically higher Sharpe ratios for the option-expiration weeks suggest that the
high average returns during the option-expiration weeks cannot be rationally attributed to an ex
ante risk-return tradeo.
Lakonishok, Lee, Pearson, and Poteshman (2007) document that nonmarket maker investors
(in aggregate) have more written than purchased open interest, with written calls making up the
majority of this written open interest. This suggests three non-fundamental-value avenues that
could promote the observed option-expiration spread in weekly mean returns. First, retail investors
could be purchasing the stock to cover their uncovered written calls or be purchasing stock so that
they do not have to lower their position in the underlying stock in the event their covered calls
expires in the money. Second, especially during option-expiration weeks with stock price increases
for other reasons, retail investors may be osetting their written call positions. Presumably, such
osetting would serve to lower the net long call position of market makers. This, in turn, could
result in market makers reducing their short stock positions that they may have in place to delta
hedge their long call positions, which might exert some upward pressure on stock prices. Third,
since the market makers tend to have a net long call position, then they would benet from stock
price increases during the option-expiration week for their long call positions that are not delta
hedged. Thus, market-makers might have an incentive to promote stock price appreciation during
the option-expiration week.
To examine the notion that the stock price might be driven up beyond the fair economic value
4
during by the option expiration, we also examine the average weekly returns for the week following
the option expiration (under the assumption that non-fundamentals price movements would tend
to be reversed in the subsequent week). For our sample of 28 large individual stocks over 1996 to
2008, the average return for fourth-Friday weeks is -2.9 basis points versus an average return of
18.1 basis points for the other weeks that are not option-expiration weeks (referring to a months
rst-Friday, second-Friday, and fth-Friday weekly return). Recall that option-expiration weeks
have a mean of 45.0 basis points, so this result suggests a return reversal in the week following the
option expiration, which is consistent with the explanation suggested in the prior paragraph.
Finally, in regard to our O/S volume ratio results for option-expiration weeks, we acknowledge
that it is possible that option activity responds to an increasing stock price (rather than the option
activity contributing to the observed high average weekly returns for the option-expiration weeks).
If so, it seems likely that other non-option-expiration weeks that have a high O/S value would also
be associated with higher average weekly stock returns. We also investigate this possibility for
our sample of 28 large stocks over 1996 to 2008. For non-option-expiration weeks that also have a
relatively high O/S volume ratio (an O/S above the 75
th
percentile value of the rms respective
O/S distribution), the average weekly stock return is 38.7 basis points across our 28 stocks. While
sizably positive, this average weekly return is only about 47% as large as the average weekly returns
for the option-expiration weeks that also have a high O/S ratio (which have an average weekly
return of 82.5 basis points). We interpret this as additional circumstantial evidence that suggest
option-related trading activity tends to promote stock price increases in the option-expiration week.
This article proceeds as follows. Section 2 reviews related theory and other related empirical
evidence. Sections 3 and 4 present our results for large individual stocks with active option trading
and size-based stock portfolios, respectively. Section 5 extends the results to the S&P 500 index.
Finally, Section 6 concludes and also provides some exploratory analysis on the likely causes of the
documented patterns for option-expiration weeks.
5
2. Additional Background and Literature Review
Why would trading activities in options have any impact on the underlying stock prices? After all,
in the Black-Scholes world, options are viewed as redundant assets whose payos may be replicated
using a dynamic trading strategy in stocks and cash, and therefore should have no impact on
underlying stock prices. A number of theoretical articles have oered some interesting perspectives
on this issue. For example, Detemple and Selden (1991) demonstrate that in incomplete markets,
the valuation of option prices and their underlying stock prices is a simultaneous pricing problem.
Although in general stock prices depend on the contractual characteristics of options available for
trading, they nd that, in a mean-variance model, option trading activity can lead to an increase
in the equilibrium stock price as well as a reduction in the stocks volatility. Cao (1999) identies a
similar eect under an alternative theoretical framework. His model predicts that the availability of
options contracts can incentivize investors eorts to collect information about asset payos, which
in turn leads to an increase in the expected prices of the underlying as well as positively correlated
assets, and a reduction in price volatility. Mayhew (2000) provides a comprehensive review on the
topic.
Other studies evaluates the pricing eects related to the introduction of option contracts; see
Conrad (1989), Detemple and Jorion (1990), and Sorescu (2000). These studies nd that option
listing is associated with positive abnormal stock returns in early years (prior to 1981) but insignif-
icant or negative returns after 1981, which is likely due to some regulatory changes in 1981.
Given our primary empirical results that indicate option-expiration weeks have higher average
stock returns and much higher Sharpe ratios than other weeks for large-cap stock with activity
traded options, the results in Ni, Pearson, and Poteshman (2005) seem particularly relevant. They
consider pricing inuences related to option activity that can be described as price movements not
strictly related to fundamental value information. Specically, they attribute the pricing patterns
they uncover to hedge rebalancing by option market makers and to stock price manipulation by
rm proprietary traders.
6
3. Weekly Returns for Large Stocks with Active Option Trading
3.1. Sample Selection
We desire to examine a set of individual stocks that have actively traded options. Further, we
wish to examine large-cap stocks, because of their economic importance and because large-cap
stocks account for most option activity, see Lakonishok, Lee, Pearson, and Poteshman (2007).
Additionally, we elect to limit the number of rms in our initial investigation so that we may report
results on each of the important stocks, rm by rm. Finally, our initial rm-level investigation is
limited to 1996 through 2008, based on availability of option trading volume from Option Metrics.
Given our goals and data limitations, we initially investigate the following set of 28 large-cap
stocks with actively traded options: International Business Machines (IBM), Texas Instruments
(TXN), 3M (MMM), Eastman Kodak (EK), Hewlett-Packard (HPQ), Coca-Cola (KO), Boeing
(BA), General Electric (GE), Wal-Mart(WMT), Merck (MRK), Halliburton (HAL), Schlumberger
(SLB), Alcoa (AA), Bristol-Myers Squibb (BMY), Johnson & Johnson (JNJ), McDonalds (MCD),
International Paper (IP), Occidental Petroleum (OXY), Honeywell (HON), Xerox (XRX), Ford (F),
Pepsico (PEP), Black & Decker (BDK), Dow Chemical (DOW), Gap (GPS), Baxter International
(BAX), Avon Products (AVP), and HJ Heinz (HNZ) (ticker in parentheses, with the rms ordered
based on the rms 75
th
percentile value of their respective weekly O/S volume ratio). These 28
rms are a subset of the 50 individual stocks from Dennis, Mayhew, and Stivers (2006) (DMS);
where the 50 rms from DMS are the 50 individual rms that have the largest option trading
volume over 1988 to 1995. These 28 rms are chosen (out of the 50) because they have both a
complete return history over 1996 through 2008 and available option trading volume from Option
Metrics. Using a sample of rms that were chosen for their high option trading activity over the
prior 1988 to 1995 period provides a set of rms that are expected to have high option activity
and provides objectivity to our rm selection. We note that these rms continue to have actively
traded options over our later sample period, but that there is a sizable cross-sectional dispersion
in the rms average O/S volume ratio across the 28 rms.
Table 1 reports summary statistics on these rms weekly stock returns, average daily stock
7
trading volume, average daily option trading volume, and the average weekly O/S volume ratio.
For the weekly O/S volume ratio, we calculate the total option volume for the ve trading-day
period ending that Friday times 100 (due to the 100 multiplier in option contracts) divided by the
total stock volume for the same ve trading-day period ending that Friday.
5
3.2. Average Weekly Returns for Option-Expiration Weeks
We begin by investigating whether the mean weekly returns ending on the third Friday of a calendar
month are dierent than other Friday weekly returns for our sample of large individual stocks. The
weekly returns are ve-day Monday-through-Friday returns, ending on a Friday.
For our empirical work here, we rst estimate the following model to calculate the spread
between third-Friday weeks and other weeks:
R
i,t
=
0
+
1
Dum
Fr3
t
+
t
(1)
Where R
i,t
is the weekly return for individual stock i, calculated as the 5-day cumulative return over
Monday-to-Friday of the week; Dum
Fr3
t
is a dummy variable that equals one if the ending Friday is
the third Friday of the calendar month; and the s are coecients to be estimated. We calculate
and report T-statistics in parentheses, based on heteroskedastic- and autocorrelation-consistent
standard errors, to indicate whether the estimated
1
is reliably dierent than zero.
Table 2 reports the results. For our primary sample of 28 large-cap individual stocks over 1996
to 2008, the average weekly return during option-expiration weeks is 45.0 basis points. In contrast,
for the other weeks, the average weekly return is only 11.8 basis points. This spread in means is
pervasive and sizable, with 13 of the 28 stocks have a spread in the weekly returns of 40 basis points
or larger. For seven of the individual stocks, the return spread is statistically signicant with a 10%
p-value or greater. Also, as shown in Table 4, Panel A, one-half subperiod results are consistent
with the return patterns in Table 2.
5
With this procedure, weeks that do not have ve trading days would go back and pick up the missing days from
the volume in the preceding week, to give ve full trading days for each weekly average. If the markets were closed on
a particular Friday, then the ve trading day period concludes on the preceding Thursday (or prior available trading
day).
8
This spread in means tends to be larger for the stocks with a high O/S volume ratio. For the
top 10 O/S stocks (ranked by the 75
th
percentile O/S volume ratio for each respective stock), the
average weekly return during option-expiration weeks is 58.3 basis points, versus 6.6 basis points
for the other weeks.
For the 28 stocks, we also nd that the average return volatility for the option-expiration weeks
is only modestly higher than the return volatility of the other weeks, at 4.97% versus 4.57%. This
modest dierent in return volatility casts doubt on a risk-return tradeo explanation for the high
average returns during the option-expiration weeks. Given these patterns in the mean and volatility
of the weekly stock returns, the Sharpe ratio during the option-expiration weeks is much higher
than the Sharpe ratio during the other weeks. The average Sharpe ratio for the option-expiration
weeks across the 28 stocks is 0.57 versus an average Sharpe ratio of 0.07 for the other weeks.
We also examine the option-expiration weeks in a GARCH system, since the volatility of the
weekly returns during the option-expiration weeks tends to be a little higher than for the other
weeks and to control for heteroskedasticity in general. We evaluate the mean and weekly volatility
of the third-Friday weekly returns in a GARCH framework that allows both the weekly mean and
volatility to be dierent for the third-Friday week (as compared to the other weeks). We estimate
the following model:
R
i,t
=
0
+
1
Dum
Fr3
t
+
t
(2)
v
i,t
=
0
+
1

2
t1
+
2
v
i,t1
+
3
Dum
Fr3
t
(3)
where v
i,t
is the conditional variance of
t
from equation (2) for week t;
2
t1
is the lagged squared
return shock; the s are coecients to be estimated for the conditional variance equation; and the
other terms are as dened for equation (1). We estimate the GARCH system, given by equations
(2) and (3), simulataneously, using maximum likelihood with a conditional normal distribution. We
compute T-statistics for each estimated coecients, based on heteroskedastic- and autocorrelation-
consistent standard errors.
We nd the following. The conclusions for the conditional mean equation are the same as
depicted in Table 2. The estimated
1
coecients indicates that the conditional mean for the
option-expiration weeks is 38.4 basis points higher than the conditional mean for the other weeks,
9
with seven of the
1
estimates being positive and statistically signicant across the 28 rms. Next,
for the variance equation, we nd that the estimated
3
coecients are positive for 21 of the 28
rms and positive and statistically signicant for 2 of the 28 rms (versus negative and statistically
signicant for 0 of the 28 rms). This indicates that the third-Friday volatility also tends to be
modestly higher than that for the other weeks, as indicated by the summary volatility results
reported earlier.
3.3. Average Weekly Returns for Option-Expiration Weeks with a Relatively
High O/S Volume Ratio
We next investigate whether the spread in mean returns between the option-expiration weeks and
other weeks is stronger when the option-expiration week also has a relatively high O/S option
volume ratio.
Here, we rst estimate the following model to calculate the spread in weekly mean returns:
R
i,t
=
0
+
1
(Dum
Fr3
t
Dum
HiOS
t
) +
t
(4)
Where Dum
HiOS
t
is a dummy variable that equals one if a weeks O/S volume ratio is above the 75
th
percentile value of the weekly O/S distribution for each respective stock. The other terms are as
dened for equation (1). Thus, the product of the two dummy variables indicates option-expiration
weeks that also have a relatively high O/S volume ratio. We calculate and report T-statistics in
parentheses, based on heteroskedastic- and autocorrelation-consistent standard errors, to indicate
whether the estimated
1
is reliably dierent than zero.
Table 3 reports the results. For our primary sample of 28 large-cap individual stocks over
1996 to 2008, the average weekly return is 82.5 basis points for option-expiration weeks that also
experience a relatively high O/S volume ratio. In contrast, for the other weeks, the average weekly
return is only 14.0 basis points. This spread in means is pervasive and sizable, with 11 of the 28
stocks having a spread in the weekly mean returns of 100 basis points or larger. For nine of the
individual stocks, the return spread is statistically signicant with a 10% p-value or greater. Also,
as shown in Table 4, Panel B, one-half subperiod results are consistent with the return patterns in
Table 3.
10
This spread in means tends to be larger for the stocks with a high O/S volume ratio. For the
top 10 O/S stocks (ranked by the 75
th
percentile weekly O/S for each respective stock), the average
weekly return is 129.1 basis points, versus 8.6 basis points for the other weeks and the return spread
is positive for all 10 stocks.
For the 28 stocks, we also nd that the average return volatility for the option-expiration weeks
with a high O/S volume ratio is only modestly higher than the return volatility of the other weeks,
at 4.87% versus 4.64%. Again, in our view, this very modest dierence in return volatility casts
doubt on a risk-return tradeo explanation for the high average returns during the option-expiration
weeks. Given these patterns in the mean and volatility of the weekly stock returns, the Sharpe
ratio during the option-expiration weeks is much higher than the Sharpe ratio during the other
weeks. The average Sharpe ratio for the option-expiration weeks across the 28 stocks is 1.25 versus
an average Sharpe ratio of 0.11 for the other weeks.
Some readers might be concerned that an increasing time trend in the O/S volume ratio might
result in essentially all of the high O/S realizations occurring later in our sample. If so, then the
O/S might not be informative, but rather our O/S results could just indicate a a higher average
weekly return for option-expiration weeks later in our sample. Our investigation indicates this is
not a material concern for the following reasons. First, as shown in Table 4, our O/S results are
reliably evident for both one-half subperiods separately (the January 1996 to June 2002 and July
2002 to December 2008 periods). Second, when estimating the O/S model over our entire 1996
to 2008 period, we tabulate what proportion of the high O/S weeks occur in the rst one-half
subperiond versus the second one-half subperiod. Across our 28 stocks, 40% of the high O/S weeks
occur in the rst one-half subperiod and 60% in the second one-half subperiod, and 8 of the 28
stocks have more high O/S weeks in the rst half of our sample. We conclude that our O/S results
are not due to an increasing time-trend in the O/S.
We also examine the option-expiration weeks in a GARCH system, since the volatility of the
weekly returns during the option-expiration weeks tends to be a little higher than for the other
weeks and to control for heteroskedasticity in general. We evaluate the mean and weekly volatility
of weekly returns in a GARCH framework that allows both the weekly mean and volatility to be
11
dierent for third-Friday weeks that also have a high O/S realization (as compared to the other
weeks). We estimate the following model:
R
i,t
=
0
+
1
(Dum
Fr3
t
Dum
HiOS
t
) +
t
(5)
v
i,t
=
0
+
1

2
t1
+
2
v
i,t1
+
3
(Dum
Fr3
t
Dum
HiOS
t
) (6)
where v
i,t
is the conditional variance of
t
from equation (4) for week t;
2
t1
is the lagged squared
return shock; the s are coecients to be estimated for the conditional variance equation; and the
other terms are as dened for equation (4). We estimate the GARCH system, given by equations
(5) and (6), simulataneously, using maximum likelihood with a conditional normal distribution. We
compute T-statistics for each estimated coecients, based on heteroskedastic- and autocorrelation-
consistent standard errors.
We nd the following. The conclusions for the conditional mean equation are the same as
depicted in Table 3. The estimated
1
coecients indicates that the conditional mean for the
option-expiration weeks is 73.4 basis points higher than the conditional mean for the other weeks,
with 12 of the
1
estimates being positive and statistically signicant across the 28 rms. Next,
for the variance equation, we nd that the estimated
3
coecients are positive for 13 of the 28
rms and positive and statistically signicant for only one of the 28 rms (versus negative and
statistically signicant for 0 of the 25 rms). This indicates that the volatility for option-expiration
weeks with a high O/S tends to be little dierent than the volatility for the other weeks, as indicated
by the summary volatility results reported earlier.
3.4. Individual Stock Results for other Sample Periods
Next, we examine our sample of 28 rms over two alternate earlier periods. First, we examine the
1983 to 1995 period. We choose this period because it is the same length as our primary 1996 to
2008 period (13 years). Also, 1983 was the year that trading in stock-index options commenced,
which we examine later in this study. We do not examine the O/S volume ratio results in this
earlier period, since the Option Metrics data begins in 1996.
Column two of Table 5 reports the results for the 1983 to 1995 period for our sample of 28
individual stocks. We nd that the spread in means between the option-expiration weeks and the
12
other weeks also tends to be positive, with an average spread in means of 26.4 basis points and
with a positive spread observed for 22 of the 28 rms. This nding supports our earlier evidence
that indicates average weekly returns tend to be higher for option-expiration weeks for individual
stocks with activity traded options.
For comparison, we also evaluate the spread in means for our sample of 28 rms over the entire
26 year period from 1983 to 2008. Column one of Table 5 reports the results. For this case, we nd
that the average spread in means is 29.8 basis points and the option-expiration spread is positive
for 26 of the 28 stocks.
Over our primary sample of 1996 to 2008, 2008 is noteworthy as a dramatic bear market with
the S&P 500 down over 38% for the year and with extreme day to day return volatility. Readers
might wonder whether this year has a strong inuence on our results. Accordingly, we also re-
estimate our primary models over the 1996 to 2007 period (omitting the 2008 data). The results
are quite similar to those reported in Tables 2 and 3.
Finally, we also evaluate 1948 to 1972 as a period that predates the opening of option trading on
the Chicago Board Option Exchange. This 25 year period is essentially the same length as our 1983
to 2008 period. Column four of Table 5 reports the results for the 1948 to 1972 period. For this
earlier period, our evaluation only includes 15 of the 28 individual stocks in our primary sample,
because we only include the stocks that have the full stock return history back to January 1948.
Over 1948 to 1972, the average weekly stock return for the third-Friday weeks is essentially the same
as for the other weeks. The average spread in means is only 0.4 basis points and only about half
the stocks have positive spreads. None of the 15 stocks have a spread in means that is statistically
signicant. This nding provides additional circumstantial evidence that option-related activity
may be important for understanding our primary results.
To conclude, over 1983 to 2008 and for inclusive subperiods, the weekly stock return for option-
expiration weeks tends to be higher for large, individual rms with actively traded options; with the
dierence being sizable and statistically reliable in many cases. Further, the average weekly return
is even higher for option-expiration weeks that also experience a relatively high option trading. In
contrast, over the pre-option period, the weekly stock returns for the 3
rd
Friday-week of a calendar
13
month is essentially the same as the other weekly returns.
4. Option-Expiration Weekly Returns for Size-based Portfolios
If option-related activity is a factor behind the patterns documented in Tables 2 through 5, then
it seems that the return patterns would be stronger for rms with actively traded stock options.
The comparisons in Tables 2 and 3 for stocks with a higher O/S volume ratio versus stocks with
a lower O/S ratio suggest the degree of option activity may be important. If so, then the return
patterns seem likely to be stronger in large-cap stock portfolios, as compared to smaller-cap stock
portfolio, since large rms have more actively traded options and many small rms have very little
option trading or may not even have publicly-traded options.
Accordingly, we investigate the weekly returns of size-based stock portfolio and report the results
in Table 6. We evaluate the weekly returns of the value-weighted, size-based, decile stock portfolios
from the French data library. The results are reported in rows one through ten of the table.
We nd that the largest size-based decile exhibits a statistically reliable spread between the
average weekly returns for the option-expiration weeks and the average weekly return of the other
weeks. The spread in weekly returns for the largest size-based decile is 27.5 basis points, with an
average option-expiration weekly return of 41.7 basis points versus an average weekly return for
the other weeks of only 14.2 basis points. The spread in means is statistically signicant at a 10%
p-value.
For the other nine size-based decile portfolios, the spread between the average weekly return
for the third Friday versus the other weeks is also positive for all cases. However, the magnitude
is appreciably lower, as compared to the largest size-based decile, and none of the spreads are
statistically reliable for the smaller nine size-based deciles.
To further investigate the dierences between the largest size-based decile and the smaller
rms, we calculate a weekly return spread dened as the dierence between the weekly return for
the largest size-based decile and the average return for that week for the smallest ve size-based
decile portfolios. Then, we evaluate the average of this weekly return spread to see if it is reliably
dierent for the third-Friday of a calendar month. The results are reported in row 11 of Table 6.
14
We nd that the average dierence between the large-rm and small-rm portfolio is 0.177% for
the third-Friday week, as compared to a -0.042% for the other weeks. The dierence of 0.220% is
statistically reliable, indicating that there a reliable dierence between the behavior in the large-rm
and small-rm stock portfolios.
To conclude, for the large-rm portfolio in Table 6, we nd that the spread between the average
weekly return for the third-Friday and the average weekly return for the other Fridays is sizable and
statistically signicant. Further, we nd that the third-Friday spread behavior is reliably stronger
in the large-rm portfolios, as compared to the smaller-rm portfolios. This behavior is consistent
with the notion that option-related activity inuences the prices of large rms that have more
actively traded stock options.
5. Weekly S&P 500 Index Returns and Option Expiration
5.1. Discussion of Main Results
Given the evidence that large-cap rms with actively traded stock options exhibit particular strong
returns during the option expiration weeks, we inquire if such a trading pattern is limited only to
these particular stocks or do they spill over to the broad market in general? In particular, we are
interested in the the performance of the S&P 500 index during option expiration weeks for two
major reasons. First, it is the most widely used benchmark index for many mutual funds as well as
hedge funds. Second, some of the most actively traded futures and option contracts are based on
the prices the S&P 500 index. Therefore if we nd a similar trading pattern in the S&P 500 index,
this indicates that our empirical ndings carry broad-based economic signicance to all investors.
We collect daily S&P 500 index prices from the Center for Research in Security Prices (CRSP)
and convert them to weekly returns. The data is available from 1962 to 2008. Similar to what
we did in previous sections, we focus on the sample period from July 1983 to December 2008 for
our main results. It should be noted that the CBOE introduces the trading of S&P 500 index
options in July 1983. We calculate weekly S&P 500 index returns using Friday-to-Friday prices. If
the stock market closes on a Friday and therefore the price on Friday is not available, then we use
15
Thursdays prices instead, and so on.
To contrast with our main sample period, we also include the results calculated from an earlier
sample period that spans from July 1962 to the week ended on July 1st, 1983 (which is a Friday).
It should be noted that during the rst half of this earlier sample period (1962 to 1972), there were
no listed option contracts available for trading. In the second half (1973 to 1983), listed option
contracts were available for some individual equities but the overall size of the option market is
quite small compared to the cash market.
Panel A of Table 7 reports the mean return, standard deviation, and return spread for the S&P
500 index during the third Friday week of a calendar month. To calculate the return spread, we
run the same regression as shown in equation (1), but for the S&P 500 index return. The estimated
coecient
1
captures the return spread between the option expiration week and other weeks of
a calendar month. For comparison, we also include the results for the full sample (both option
expiration week and other weeks of a calendar month).
We nd that the mean return for the third Friday week is 37 basis points, more than double the
average return for the full sample average of 15 basis points for all weeks. Meanwhile the volatility
during the third Friday week is about the same as the full sample average. The return spread
between third Friday week and other weeks is also signicantly positive at 28 basis points.
Further, we nd the results are strikingly dierent for the pre-1983 sample. Here the third
Friday weekly returns do not appear to be dierent from other weeks. The mean return for third
Friday weeks is 11 basis points, nearly identical to the full sample average of 12 basis points. The
return spread between option expiration weeks and non-expiration weeks is -1 basis points and
statistically insignicant. In terms of return standard deviations, option expiration weeks and
other weeks are also very similar (1.95% vs. 1.99%).
Hence our results indicate that there appear to have been a change in the markets trading
activity during the option expiration weeks in the two sample periods. When trading in option
contracts are either not available or relatively unimportant due to a small market size, returns in
the third Friday weeks are not dissimilar to other weeks. However as options market become more
active in the more recent sample, returns in the third Friday weeks become pronouncedly more
16
positive than other weeks. This evidence supports the notion that stock market prices are not
independent of the trading activities from the options market and the two markets are interrelated.
In Panel B, we further check the consistency of our results across two half-sample subperiods:
1983 to 1996 and 1996 to 2008. We show that the mean returns for third Friday weeks are about
the same in both sub-samples. However, since the S&P 500 index has a much stronger performance
in the rst half sample (with average return of 0.22%) than in the second half sample (with average
weekly return of only 0.02%), the return spreads between third Friday weeks and other weeks are
actually bigger in the second half than in the rst half (0.36% vs 0.21%). Overall, we nd the
results are consistent across the two subperiods.
5.2. Robustness Checks
Next we investigate if our results are aected by large shocks to the nancial markets during our
main sample period. Two major events stand out during the 1983 to 2008 sample period. First,
the stock market crashed on October 19, 1987, which is a Monday after the option expiration. Is it
possible that the large negative return from the Black Monday could have exerted a downward
bias on non-expiration week returns? To investigate this possibility, we recalculate our main results
by excluding the weekly return from the 1987 market crash. Second, nancial markets were closed
for the rest of the week after the terrorist attack that occurred on September 11, 2001. The following
week is an option expiration week. Therefore to account for the markets reaction to this event, we
exclude both weeks (the September 11 week and the following week) from our sample.
Panel C of Table 7 reports the results after adjusting for these two events. The results show that
the 1987 market crash has little impact on our results, whereas accounting for the September 11
event actually increases the statistical signicance of positive return spread for third Friday weeks.
This is due to the fact that the stock market dropped more than 10% after it reopened in the week
following the September 11 attack. Thus we conclude that our main results are not aected by
these two events.
Is it likely that our results are caused by some well-documented seasonal patterns in weekly
stock returns for the market indexes? In particular, Ariel (1987) nd that returns of the CRSP
17
value-weighted and equal-weighted indexes are very strong around the turn of a month, dened
as the last trading day of a month plus the rst three trading days of a month, and weak during
other trading days of a month. Lakonishok and Smidt (1988) also conrms this turn of month
eect using 90 years of data on the Dow Jones Industrial Average. Since the third-Friday weeks
do not coincide with turn of the month days, our results are unlikely to be driven by this eect.
Nevertheless it is interesting to know what our results will look like after controlling for this eect.
To this end, we exclude the weekly S&P 500 returns that do not belong to the third-Friday week
or the two weeks adjacent to it. In other words, for every calendar month, we only examine the
returns from the three weeks around option expiration. In Panel D of Table 7, we nd that by
excluding the weeks not neighboring the option expiration, the sample mean return is reduced by
about two thirds from 0.15% to only 0.05% in our 1983 to 2008 sample. This shows that the turn
of month eect continues to be signicant in our sample period. Meanwhile excluding the turn of
month eect also strengthens our main result. We nd the spread between third Friday weeks and
other weeks now increases to 48 basis points with a t-statistic of 3.
Overall we nd the third-Friday returns for the S&P 500 exhibit similar patterns as those stocks
with actively traded options and large-cap stock portfolios. The pattern is consistent across the
subperiod samples and robust after accounting for the 1987 market crash, September 11, 2001
terrorist attack, as well as the turn of the month eect. Further the lack of a similar pattern in the
pre-1983 sample indicates that it likely to be attributable to option market trading activities.
6. Conclusions and Additional Evidence towards Interpretation
We document that large-cap stocks with actively traded options tend to have higher average weekly
returns during third-Friday weeks of the month over 1983 to 2008, with consistent subperiod results.
This empirical regularity is also evident in several large-cap-dominated stock portfolios that we
examine. Further, over the 1996 to 2008 period with available Option Metrics data, we nd that
the average weekly stock return for option-expiration weeks tends to be appreciably larger for
option-expiration weeks that also experience a relatively high option trading volume, relative to
the underlying stock trading volume.
18
In contrast, for our sample of large-cap stocks, the average weekly stock return for the third-
Friday of a calendar month is not dierent than other weeks for a pre-option-market sample over
1948 to 1972. Further, over our recent sample period of 1983 to 2008, the third-Friday average
weekly returns are not much dierent than other weeks for smaller-cap stock portfolios, which
contains stocks with relatively less option trading activity.
In our view, this collective evidence provides solid circumstantial evidence that suggests option
activity tends to contribute to higher average returns during the option-expiration week, at least
for stocks with relatively high option trading activity. Further, the much higher Sharpe ratios for
option-expiration weeks suggest that the high average returns during the option-expiration weeks
cannot be rationally attributed to an ex ante risk-return tradeo.
However, it is unclear what types of option-related activity might contribute to understanding
the documented eect in option expiration weeks. While our aggregated option volume data limits
us on what we can determine in this area, we do discuss some limited exploratory analysis in this
direction in this concluding section.
With access to a unique option data set, Lakonishok, Lee, Pearson, and Poteshman (2007)
document that nonmarket maker investors (in aggregate) have more written than purchased open
interest, with written calls making up the majority of this written open interest. Further, they
note (page 841) that call writing is the most important category of option trade, based on open
interest, and the second most important, based on open volume. In our view, their summary
of option market activity suggests three non-fundamental-value avenues that could promote the
observed option-expiration spread in weekly mean returns.
First, retail investors could be purchasing the stock to cover their uncovered written calls or be
purchasing stock so that they do not have to lower their position in the underlying stock in the
event their covered calls expires in the money. Such stock demand could tend to promote a stock
price increase during the option-expiration week. Presumably, such activity would be amplied if
the stock price were increasing during the option-expiration week for fundamentals reasons.
Second, especially during option-expiration weeks with stock price increases for fundamentals
reasons, retail investors may be generating sizable option volume by osetting their existing written
19
call positions. Presumably, such osetting would serve to lower the net long call position of market
makers. This, in turn, could result in market makers lowering their short stock positions that they
may have in place to delta hedge their long call positions. Market makers covering their short stock
positions could promote further stock price increases during the option-expiration week.
Third, since the market makers tend to have a net long call position, then they would benet
from stock price increases during the option-expiration week for their long call positions that are not
delta hedged. Thus, market-makers might have an incentive to promote stock price appreciation
during the option-expiration week.
If upward stock price movements during option-expiration weeks tend to have a partial non-
fundamental-value component, then one would presumably expect to see lower average returns
during the week following option expiration, as prices revert to their fundamental value. Accord-
ingly, we also examine the average weekly returns for the week following the option expiration. For
our sample of 28 large individual stocks over 1996 to 2008, the average return for fourth-Friday
weeks is -2.9 basis points (with a median of -4.8 basis points) versus an average return of 18.1 basis
points (with a median of 12.8 basis points) for the other weeks that are not option-expiration weeks
(referring to a calendar months rst-Friday, second-Friday, and fth-Friday weekly return). Recall
that option-expiration weeks have a mean of 45.0 basis points (with a median of 48.4 basis points
across our 28 stocks), so this result suggests a return reversal in the week following the option
expiration, which is consistent with the explanation suggested in the prior paragraph.
6
Next, recall that the average weekly stock returns for option-expiration weeks are especially
large when the option-expiration week also experiences a relatively high O/S volume ratio. As we
pointed out in our introduction, we acknowledge that it is possible that option activity responds
to an increasing stock price (rather than the option activity contributing to the observed high
average weekly returns for the option-expiration weeks). If so, it seems likely that other non-
option-expiration weeks that have a high O/S value would also be associated with higher average
weekly stock returns. We investigate this possibility for our sample of 28 large stock over 1996
6
The same analysis over the earlier 1983 to 1995 period yield consistent results. For this earlier period, the average
weekly stock return for fourth-Friday weeks is -9.2 basis points versus an average weekly stock return of 55.9 basis
points for the option-expiration weeks.
20
to 2008. For non-option-expiration weeks that also have a relatively high O/S volume ratio, the
average weekly stock return is 38.7 basis points (with a median of 32.1 basis points for the 28
stocks) across our 28 stocks.
7
While sizably positive, this average weekly return is only about 47%
as large as the average weekly returns for the option-expiration weeks that also have a high O/S
ratio (which have an average weekly return of 82.5 basis points with a median of 86.6 basis points
for the 28 stocks).
Finally, our above discussion and the supplementary results suggest that written calls held by
non-market makers may have a role in understanding our primary ndings. If so, then activity
related to written calls (such as osetting written calls that may otherwise expire in the money)
should be stronger following periods of up movement in the underlying stock prices. If so, then
option-related inuences on the underlying stock price during option-expiration weeks may be
stronger following recent stock price appreciation. To investigate this possibility, we calculate the
average returns for third-Friday weeks following positive prior three-week returns and negative
prior three-week returns. We conjecture that average option-expiration week stock returns may be
higher when the prior three-week returns are positive (as contrasted to the case when the prior
three-week returns are non-positive). The evidence in Panel D of Table 7 supports this conjecture.
We nd that for the S&P 500 index, the third-Friday weekly average return following positive
prior three-week returns is almost twice as much as the mean return conditional on negative prior
three-week returns. In addition, volatility is lower and the proportions of positive returns are also
higher following positive prior three-week returns.
Overall, we interpret this sections additional evidence as supportive of the notion that option-
related activity contributes to the high average stock returns that we document for the option-
expiration week. In later revisions to this study, we hope to further probe the potential explanations
that may be behind our intriguing empirical ndings tied to the option-expiration weeks.
7
Recall that we dene a high O/S value as an O/S realization above the 75
th
percentile value of the rms respective
O/S distribution.
21
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Conrad, Jennifer, 1989, The price eect of option introduction, The Journal of Finance 44, 487499.
Dennis, Patrick, Stewart Mayhew, and Chris Stivers, 2006, Stock returns, implied volatility in-
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Roll, Richard, Eduardo Schwartz, and Avanidhar Subrahmanyam, 2010, O/S: The relative trading
activity in options and stock, Journal of Financial Economics 96, 117.
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23
Table 1: Return and Volume Statistics for 28 Large Individual Stocks
This table reports summary weekly return and weekly volume statistics for our primary sample of 28
large individual stocks. Column one reports the ticker for each individual large stock. Columns 2 and 3
report the mean and standard deviation of the weekly stock returns, dened as ve-day Monday-through-
Friday returns, ending on a Friday. Column 4 reports the mean weekly option volume, dened as [the
number of traded contracts times 100] divided by [the shares of common stock outstanding divided by
1000]. Column 5 reports the mean stock volume, or turnover, dened as [the number of shares traded]
divided by [the shares of common stock outstanding divided by 1000]. Columns 6 through 9 report on
the ratio of the weekly option volume (dened for column 4) divided by the weekly stock volume (dened
for column 5), denoted as O/S. Columns 6 through 9 report on the mean, median, standard deviation,
and 75
th
percentile of the weekly O/S volume ratio for each respective stock. The sample period is 1996
to 2008, corresponding to the data availability from Option Metrics.
1. Ticker 2. Mean 3. StDev 4. Mean 5. Mean 6. Mean 7. Median 8. StDev 9. 75
th
Wkly Ret Wkly Ret Opt Vol Stk Vol O/S O/S O/S Pctl O/S
IBM 0.298% 4.327% 2.675 4.883 0.535 0.483 0.212 0.644
TXN 0.349% 6.668% 1.857 8.564 0.213 0.188 0.106 0.271
MMM 0.185% 3.430% 0.999 4.286 0.210 0.172 0.171 0.265
EK -0.176% 4.853% 1.766 8.424 0.203 0.178 0.127 0.244
HPQ 0.285% 5.576% 0.814 4.411 0.183 0.163 0.095 0.225
KO 0.127% 3.621% 0.438 2.407 0.189 0.174 0.082 0.225
BA 0.146% 4.666% 1.018 5.060 0.191 0.163 0.187 0.223
GE 0.164% 3.910% 0.493 2.522 0.196 0.176 0.107 0.221
WMT 0.336% 4.047% 0.498 2.505 0.173 0.155 0.102 0.220
MRK 0.133% 4.194% 0.717 3.688 0.190 0.170 0.123 0.213
HAL 0.303% 6.561% 1.954 10.840 0.164 0.140 0.103 0.208
SLB 0.287% 4.985% 1.161 6.490 0.166 0.150 0.085 0.205
AA 0.151% 5.548% 1.284 7.249 0.140 0.103 0.111 0.191
BMY 0.169% 4.133% 0.693 3.482 0.181 0.129 0.198 0.190
JNJ 0.234% 3.210% 0.426 2.727 0.155 0.143 0.074 0.186
MCD 0.241% 3.677% 0.868 4.529 0.158 0.105 0.355 0.164
IP -0.022% 4.512% 0.700 6.167 0.115 0.093 0.117 0.143
OXY 0.396% 4.336% 0.590 4.922 0.095 0.062 0.083 0.141
HON 0.195% 4.959% 0.574 4.618 0.106 0.083 0.106 0.136
XRX 0.097% 6.907% 0.551 5.739 0.098 0.086 0.065 0.133
F 0.042% 6.559% 0.884 9.657 0.108 0.097 0.056 0.132
PEP 0.199% 3.398% 0.301 2.902 0.102 0.090 0.054 0.123
BDK 0.163% 4.644% 1.000 9.050 0.091 0.061 0.094 0.118
DOW 0.131% 4.225% 0.456 4.536 0.100 0.076 0.162 0.117
GPS 0.300% 5.885% 0.494 6.348 0.083 0.069 0.056 0.101
BAX 0.271% 4.023% 0.357 4.541 0.082 0.057 0.145 0.091
AVP 0.288% 4.870% 0.345 5.644 0.058 0.046 0.051 0.077
HNZ 0.142% 2.993% 0.251 3.929 0.051 0.031 0.084 0.053
Average 0.194% 4.668% 0.863 5.361 0.155 0.130 0.118 0.188
24
Table 2: Average 3
rd
Friday Weekly Returns for 28 Large Individual Stocks
This table reports the average weekly returns for 3
rd
-Friday weeks (the option-expiration week) for
our sample of 28 large-cap stock with active option trading. The weekly returns are ve-day Monday-
through-Friday returns, ending on a Friday. The sample period is 1996 to 2008, corresponding to the data
availability from Option Metrics. Column one reports the ticker for each individual large stock. Column
two reports the average return on the 3
rd
-Friday weeks when options expire. Column three reports the
average return for the remaining weekly returns. Column four reports the spread in the mean returns
between columns two and three, with t-statistics in parenthesis that are calculated with heteroskedastic
and autocorrelation consistent standard errors. For the t-statistics in parentheses for column four,
1
,
2
,
3
, indicate 1%, 5%, and 10% p-values, respectively.
1. Ticker 2. Mean 3. Mean 4. Spread of
3
rd
Friday Other Weeks Means
(Col. 2 - Col 3.)
IBM 0.758% 0.161% 0.597% (1.30)
TXN 0.553% 0.288% 0.266% (0.43)
MMM 0.496% 0.092% 0.404% (1.16)
EK 0.141% -0.271% 0.412% (0.84)
HPQ 1.080% 0.047% 1.033% (1.87)
3
KO 0.596% -0.013% 0.608% (1.65)
3
BA 0.274% 0.108% 0.166% (0.35)
GE 0.747% -0.011% 0.758% (1.91)
3
WMT 0.471% 0.296% 0.175% (0.43)
MRK 0.708% -0.039% 0.747% (1.84)
3
HAL 0.342% 0.292% 0.050% (0.08)
SLB 0.633% 0.183% 0.450% (0.91)
AA 0.113% 0.163% -0.050% (-0.10)
BMY 0.131% 0.181% -0.050% (-0.12)
JNJ 0.746% 0.080% 0.665% (1.97)
2
MCD 0.061% 0.295% -0.234% (-0.66)
IP 0.606% -0.210% 0.817% (1.86)
3
OXY 0.662% 0.317% 0.346% (0.86)
HON 0.371% 0.143% 0.228% (0.44)
XRX 0.470% -0.015% 0.485% (0.66)
F 0.184% 0.000% 0.184% (0.30)
PEP 0.157% 0.212% -0.055% (-0.17)
BDK 0.657% 0.016% 0.641% (1.39)
DOW -0.007% 0.172% -0.179% (-0.44)
GPS 0.296% 0.301% -0.005% (-0.01)
BAX 0.532% 0.193% 0.339% (0.81)
AVP 0.312% 0.280% 0.032% (0.08)
HNZ 0.513% 0.031% 0.482% (1.79)
3
average(all 28) 0.450% 0.118% 0.333%
average(1st 10) 0.583% 0.066% 0.517%
average (last 10) 0.348% 0.133% 0.215%
25
Table 3: Average 3
rd
Friday Weekly Returns when Option Trading is High: Large Individual Stocks
This table reports the average weekly returns for 3
rd
-Friday weeks (the option-expiration week) when
the option trading volume is relatively high for our sample of 28 large-cap stocks. Weeks are categorized as
having a relatively high option trading volume when the option volume is high relative to the underlying
stock trading volume, as explained in Table 1. The sample period is 1996 to 2008. Column one reports
the ticker for each individual large stock. Column two reports the average return on the 3
rd
-Friday weeks
that have a relatively high O/S option-stock volume ratio. Column three reports the average return for
the remaining weekly returns. Column four reports the spread in the mean returns between columns two
and three, with t-statistics in parenthesis that are calculated with heteroskedastic and autocorrelation
consistent standard errors. For the t-statistics in column four,
1
,
2
,
3
, indicate 1%, 5%, and 10% p-values,
respectively. Column ve reports the number of weekly returns that meet the column-two conditions for
each stock.
1. Ticker 2. Mean 3. Mean 4. Spread of 5. Number
3
rd
Friday Other Weeks Means of Weeks
High Opt. Vol. (Col. 2 - Col 3.) Col. 2
IBM 1.403% 0.177% 1.226% (1.70)
3
67
TXN 1.267% 0.266% 1.000% (1.02) 56
MMM 0.532% 0.158% 0.373% (0.72) 49
EK 1.551% -0.296% 1.847% (2.61)
1
44
HPQ 1.341% 0.184% 1.157% (1.37) 59
KO 1.430% -0.004% 1.434% (2.85)
1
62
BA 0.803% 0.097% 0.706% (1.07) 47
GE 1.756% 0.017% 1.738% (2.90)
1
57
WMT 1.044% 0.278% 0.765% (1.38) 51
MRK 1.779% -0.018% 1.797% (3.21)
1
57
HAL 0.006% 0.325% -0.319% (-0.38) 47
SLB 0.905% 0.229% 0.676% (0.84) 58
AA -0.071% 0.165% -0.237% (-0.34) 40
BMY 0.564% 0.139% 0.425% (0.67) 48
JNJ 1.370% 0.121% 1.249% (2.76)
1
61
MCD 1.057% 0.180% 0.876% (1.72)
3
47
IP 1.005% -0.103% 1.108% (1.45) 49
OXY 0.688% 0.376% 0.311% (0.40) 43
HON 0.153% 0.199% -0.046% (-0.05) 52
XRX 0.387% 0.074% 0.313% (0.20) 49
F 0.554% 0.006% 0.548% (0.62) 45
PEP 0.309% 0.191% 0.118% (0.21) 44
BDK 0.068% 0.171% -0.103% (-0.19) 50
DOW 0.317% 0.117% 0.200% (0.32) 46
GPS 0.373% 0.294% 0.079% (0.09) 51
BAX 1.253% 0.198% 1.055% (2.10)
2
47
AVP 0.104% 0.300% -0.196% (-0.26) 43
HNZ 1.152% 0.062% 1.090% (2.70)
1
50
average(all 28) 0.825% 0.140% 0.685%
average(1st 10) 1.291% 0.086% 1.204%
average (last 10) 0.467% 0.161% 0.306%
26
Table 4: 3
rd
Friday Weekly Returns: One-Half Subperiod Results
This table reports the comparable results from Tables 2 and 3 for one-half subperiod analysis for our
sample of 28 large individual stocks. Panel A reports on the same analysis as for Table 2 for the 3
rd
-Friday
mean weekly returns. Panel B reports on the same analysis as for Table 3 for the 3
rd
-Friday mean weekly
returns for weeks with a relatively high option volume (high O/S ratio). The two subperiods run from
January 1996 to June 2002 and from July 2002 to December 2008, with 339 weeks in each subperiod.
Column four reports the spread in the mean returns between columns two and three, with the number
in parenthesis, (), indicating the number of stocks with a positive spread, and the number in brackets, [],
indicating the number of stocks where the spread is positive and statistically signicant at a 10% p-value
or better. As in Tables 2 and 3, the individual stocks are ranked from 1 to 28, based on each stocks O/S
volume ratios 75
th
percentile value.
Panel A: 3
rd
Friday Weekly Returns - Subperiods
1. Ticker 2. Mean 3. Mean 4. Spread of
3
rd
Friday Other Weeks Means
(Col. 2 - Col 3.)
First Half: Jan:1996 to Jun:2002
average(all 28) 0.488% 0.241% 0.247% (19) [1]
average(1st 10) 0.719% 0.175% 0.544% (9) [1]
average (last 10) 0.351% 0.326% 0.025% (6) [0]
Second Half: Jul:2002 to Dec:2008
average(all 28) 0.412% -0.006% 0.418% (22) [4]
average(1st 10) 0.368% 0.029% 0.339% (7) [3]
average (last 10) 0.364% -0.062% 0.426% (9) [0]
Panel B: 3
rd
Friday Weekly Returns with High Option Volume- Subperiods
1. Ticker 2. Mean 3. Mean 4. Spread of
3
rd
Friday Other Weeks Means
High Opt. Vol. (Col. 2 - Col 3.)
First Half: Jan:1996 to Jun:2002
average(all 28) 0.913% 0.234% 0.679% (22) [6]
average(1st 10) 1.248% 0.198% 1.050% (9) [3]
average (last 10) 0.619% 0.302% 0.317% (7) [2]
Second Half: Jul:2002 to Dec:2008
average(all 28) 0.742% 0.035% 0.707% (23) [11]
average(1st 10) 0.741% 0.053% 0.668% (9) [4]
average (last 10) 0.446% -0.001% 0.448% (6) [3]
27
Table 5: Average 3
rd
Friday Weekly Returns for 28 Large Individual Stocks: Other Periods
This table reports how the mean weekly returns ending on the 3
rd
Friday of a calendar month are
dierent than other Friday weekly returns for a sample of large individual stocks. This table reports
results for the following periods: 1983 to 2008, 1985 to 1995, 1996 to 2008, and 1948 to 1972. Over 1983
to 2008, our sample includes the following 28 large individual stocks: AA, AVP, BA, BAX, BDK, BMY,
DOW, EK, F, GE, GPS, HAL, HNZ, HON, HPQ, IBM, IP, JNJ, KO, MCD, MMM, MRK, OXY, PEP,
SLB, TXN, WMT, and XRX (by ticker). Over 1948 to 1972, our sample includes the following 15 large
rms, which are the rms from our 1983 to 2008 sample that have return data over the entire 1948 to 1972
period: BA, BDK, BMY, DOW, EK, GE, HNZ, HON, IBM, IP, JNJ, KO, MMM, MRK, and PEP (by
ticker). T-statistics are in parentheses, based on heteroskedastic- and autocorrelation-consistent standard
errors. For row 6 (8), we report the number of the estimated coecients that are positive (negative) and
statistically signicant at a 10% p-value, or better.
1. 2. 3. 4.
Sample Period: 1983 - 2008 1983 - 1995 1996 - 2008 1948 - 1972
1. Average Weekly Return, 0.505% 0.559% 0.450% 0.341%
3
rd
Friday Weeks
2. Average Weekly Return, 0.206% 0.295% 0.118% 0.337%
Other Weeks
3. Average Spread, 0.298% 0.264% 0.333% 0.004%
3
rd
Friday less Others
4. Median Spread, 0.267% 0.254% 0.342% 0.039%
3
rd
Friday less Others
5. Positive Spreads 26 of 28 22 of 28 22 of 28 8 of 15
6. Positive & Signicant Spreads 8 of 28 4 of 28 7 of 28 0 of 15
7. Negative Spreads 2 of 28 6 of 28 6 of 28 7 of 15
8. Negative & Signicant Spreads 0 of 28 0 of 28 0 of 28 0 of 15
28
Table 6: Option-Expiration Weekly Returns for Size-based Portfolios
This table reports how the mean weekly returns ending on the 3
rd
Friday of a calendar month are
dierent than other Friday weekly returns for size-based portfolios returns. The weekly returns are
ve-day Monday-through-Friday returns, ending on a Friday. To calculate the spreads, we estimate the
same model as in Table ??. The size-based decile portfolios in rows 1 through 10 are the value-weighted
portfolios from the French data library. In row 11, the [10 minus (Mean of 1 to 5)] is the dierence
between the weekly return of the largest decile-10 portfolio and the average of the weekly returns of
the smallest ve size-based deciles. The sample period is 1983 to 2008. T-statistics are in parentheses,
based on heteroskedastic- and autocorrelation-consistent standard errors.
Portfolios: 1. Mean 2. Mean 3. Spread 4. T-stat.
Size Deciles of 3
rd
Friday of Other between Col. 1 on
& Other Weekly Returns Weekly Returns & Col. 2 the Spread
1. Decile-1 0.185% 0.168% 0.017% (0.13)
2. Decile-2 0.234% 0.181% 0.054% (0.36)
3. Decile-3 0.269% 0.192% 0.078% (0.50)
4. Decile-4 0.259% 0.179% 0.080% (0.51)
5. Decile-5 0.249% 0.202% 0.047% (0.30)
6. Decile-6 0.254% 0.200% 0.054% (0.36)
7. Decile-7 0.278% 0.208% 0.069% (0.46)
8. Decile-8 0.280% 0.196% 0.085% (0.54)
9. Decile-9 0.317% 0.195% 0.123% (0.82)
10. Decile-10 0.417% 0.142% 0.275% (1.81)
11. 10 minus 0.177% -0.042% 0.220% (2.09)
(Mean of 1 to 5)
29
Table 7: 3
rd
Friday Weekly Returns: S&P 500 Index
This table reports how the mean weekly returns ending on the 3
rd
Friday of a calendar month are
dierent from other weekly returns for the S&P 500 index. We report the mean return, standard
deviation, and return spread for various sample periods. Panel A shows the main results from July
1983 to December 2008. To contrast, we also include the earlier sample results from 1962 to 1983.
Panel B report the results for two half-sample subperiods from July 1983 to April 1996 and April
1996 to December 2008. Panel C shows the results after excluding the weeks during October 1987
market crash and the September 11, 2001 terrorist attack. Panel D accounts for the turn of the
month eect and the triple-witching weeks. Panel E reports the results conditional on positive or
non-positive prior three-week returns. The results are shown in percentage form. The return spreads
are calculated from equation (1). T-statistics are reported in parentheses.
Panel A: S&P 500 Index Weekly Returns and Option Expirations
1983 to 2008 1962 to 1983
Mean Return Std Dev Spread Mean Return Std Dev Spread
3
rd
Friday Weeks 0.3702 2.3415 0.2838 0.1121 1.9512 -0.0108
(2.77) (1.94) (0.91) (-0.08)
All Weeks 0.1517 2.2494 0.1204 1.9925
(2.46) (2.00)
Panel B: Subperiod Evidence
July 1983 to April 1996 April 1996 to December 2008
Mean Return Std Dev Spread Mean Return Std Dev Spread
3
rd
Friday Weeks 0.3844 1.8807 0.2110 0.3560 2.7253 0.3568
(2.53) (1.21) (1.62) (1.51)
All Weeks 0.2219 1.8902 0.0813 2.5571
(3.03) (0.82)
30
Table 7: (continued)
Panel C: 1987 Market Crash and September 11, 2001
Excluding 1987 Market Crash Excluding September 11, 2001
Mean Return Std Dev Spread Mean Return Std Dev Spread
3
rd
Friday Weeks 0.3702 2.3415 0.2718 0.4094 2.2425 0.3236
(2.77) (1.88) (3.19) (2.23)
Full Sample 0.1609 2.2246 0.1601 2.2278
(2.64) (2.62)
Panel D: Third Friday Week Returns Conditional on Prior 3-Week Returns
Positive Prior 3-Week Returns Non-Positive Prior 3-Week Returns
Mean Return Std Dev % > 0 Mean Return Std Dev % > 0
3
rd
Friday Weeks 0.5154 1.5992 64.34 0.2644 2.7546 55.93
(3.66) (1.27)
31