Download or read book Disagreement in Option Market and Cross Section Stock Returns written by Cai Zhu and published by . This book was released on 2015 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the paper, we find out that there is a significant relation between option trading volume and open interest distributions across various strike levels and expected stock returns. Specifically, we construct volume and open interest weighted option strike dispersions. Portfolio level analysis and firm-level cross-sectional regression both indicate a negative and significant relation between expected returns and option strike dispersion. The results are consistent with Miller (1977) theory. The option strike dispersion can be regarded as a proxy for investors' belief dispersion. Long-short strategy purchasing stocks with low option strike dispersion and shorting those with high option strike dispersion earns annualized abnormal return 14.05% with sharp ratio 0.79.