Information Content of Hedge Fund Equity Option Holdings

Abstract

Using a novel sample of 13F reports, the authors document that hedge funds prefer to purchase equity options whose characteristics are particularly well-suited for informed trading. They show that hedge funds purchase liquid high-embedded leverage options without lottery-like skewness. Consistent with informed trading, they find that directional options held by hedge funds deliver superior returns. Although 13F holdings are reported with a 45-day lag, the authors demonstrate that investors can earn profits by utilizing publicly available information on hedge funds’ option holdings. They confirm that hedge funds’ options add value to the total portfolios, indicating that options are economically significant.