Maturity Driven Mispricing of Options

Abstract This paper documents that short-term options achieve significantly lower returns during months with 4 versus 5 weeks between expiration dates. The average return differential ranges from 16 to 29 basis points per week for delta-hedged portfolios, and 101 187 straddles, over 1996–2017. Evidence based on earnings announcements institutional holdings suggests investor inattention exact date rather than underlying risk exposures or transaction costs can explain the mispricing. Market makers seem adjust prices accordingly, tend over-trade mispriced against less sophisticated investors.