Differences in Options Investors' Expectations and the Cross Section of Stock Returns
We provide strong evidence that differences in expectations (DiE) among options investors, measured from the dispersion of equity options trading volume across moneyness levels, contain valuable information about future stock returns. Stocks with high DiE consistently underperform on average those with low DiE by more than 1% per month, with the negative DiE return relationship strongest when short sale constraints are high and among stocks that exhibit relatively high arbitrage risk. Moreover, we document that the DiE effect is highly persistent, pronounced in high sentiment periods, and is robustly distinct from a large array of previously documented cross sectional return predictors.