Prediction of Stock Returns Using Implied Volatility of Options in Tehran Stock Exchange

Subject Areas : Financial engineering

yosef Javidkia ^{1 *} , Moslem Peymany Foroushany ² , Meysam Amiri ³

1 - Master of Science, Department of Finance and Banking, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran, Iran
2 - Associate Professor, Department of Finance and Banking, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran, Iran
3 - Assistant Professor, Department of Finance and Banking, Faculty of Management and Accounting, Allameh Tabataba’i University, Tehran, Iran

Received: 2024-12-08 Accepted : 2025-04-22 Published : 2025-09-23

Keywords: Implied volatility, Stock return, Option, Fama macbeth regression,

Abstract :

Understanding the flow of information between options trading and stock markets is one of the important topics in modern finance, and the growing trading volume in Iran’s emerging options market increases the importance of examining its impact on the stock market. The aim of this study is to examine the possibility of predicting stock returns using changes in implied volatilities of options in the Tehran Stock Exchange. In this study, implied volatilities are first calculated using the Newton-Raphson method and binary search, and considering the Black, Scholes, and Merton pricing model along with other factors related to the option and the underlying stock, they are used within the Fama-MacBeth regression framework to predict stock returns. Moreover, in order to investigate different time dimensions, three rolling periods of 40, 60 and 80 days are analyzed. The data used in this study include information related to option transactions in the Tehran Stock Exchange from the beginning of 2018 to the end of June 2023. Based on the results obtained from the fitted regressions, it was found that in the Tehran Stock Exchange, there are still several factors outside the framework of the examined model that significantly affect trading trends and stock return behavior. Also, during the study period, variables such as the gap between realized and implied volatilities, the beta coefficient, and changes in implied volatilities do not have the ability to predict future stock returns and have not had a significant effect on them. In contrast, factors such as recent price trend (momentum) in all three models, and company size and option trading volume in two models, have been able to influence stock returns. Furthermore, in the model with the 40-day rolling period, short-term return reversal and realized volatilities have also been identified as factors affecting stock returns

References:

1) پیمانی, مسلم, هوشنگی, زهره. (1396).تخمین و مقایسه مدل‌های تعادلی نرخ سود کوتاه‌مدت اسناد خزانه اسلامی .مهندسی مالی و مدیریت اوراق بهادار, 111-89 .، (33)8
2) خادم الحسینی اردکانی, موسویان, سیدعباس. (2012). مهندسی مالی اسناد خزانه اسلامی. اقتصاد اسلامی, 12(45), 107-13.‎
3) سعیدی, ع., علیمحمدی, ش., & شهریار. (1393). بررسی عوامل مؤثر بر تغییرات قیمت قراردادهای آتی در بورس کالای ایران. مهندسی مالی و مدیریت اوراق بهادار, 5(20), 41-56.‎
4) نیسی, ع., و پیمانی فروشانی, م. (1398) مدلسازی مالی با استفاده از نرم افزار MATLAB: انتشارات دانشگاه عالمه طباطبائی تهران.
1)Amin, K. I., & Lee, C. M. (1997). Option trading, price discovery, and earnings news dissemination. Contemporary Accounting Research, 14(2), 153-192.
2)Antônio, R. M., Lima, F. G., dos Santos, R. B., & Rathke, A. A. T. (2019). Use of Derivatives and Analysts’ Forecasts: New Evidence from Non‐financial Brazilian Companies. Australian Accounting Review, 29(1), 220-234. Bali, T. G., & Hovakimian, A. (2009). Volatility spreads and expected stock returns. Management Science, 55(11), 1797-1812.
3)Beckers, S. (1981). Standard deviations implied in option prices as predictors of future stock price variability. Journal of Banking & Finance, 5(3), 363-381.
4)Cao, C., Chen, Z., & Griffin, J. M. (2005). Informational content of option volume prior to takeovers. The Journal of Business, 78(3), 1073-1109.
5)Cao, J., & Han, B. (2013). Cross section of option returns and idiosyncratic stock volatility. Journal of Financial Economics, 108(1), 231-249.
6)Chan, K., Chung, Y. P., & Fong, W. M. (2002). The informational role of stock and option volume. The Review of Financial Studies, 15(4), 1049-1075.
7)Chiras, D. P., & Manaster, S. (1978). The information content of option prices and a test of market efficiency. Journal of Financial Economics, 6(2-3), 213-234.
8)Christensen, B. J., & Prabhala, N. R. (1998). The relation between implied and realized volatility. Journal of financial economics, 50(2), 125-150.
9)Dimson, E. (1979). Risk measurement when shares are subject to infrequent trading. Journal of Financial Economics, 7(2), 197-226.
10)Easley, D., O'hara, M., & Srinivas, P. S. (1998). Option volume and stock prices: Evidence on where informed traders trade. The Journal of Finance, 53(2), 431-465.
11)Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. Journal of political economy, 81(3), 607-636.
12)Goyal, A., & Saretto, A. (2009). Cross-section of option returns and volatility. Journal of Financial Economics, 94(2), 310-326.
13)Hull, J. (2018). Options, futures and other derivatives/John C.
Jegadeesh, N., & Titman, S. (1993). Returns to buying winners and selling losers: Implications for stock market efficiency. The Journal of finance, 48(1), 65-91.
14)Lakonishok, J., Lee, I., Pearson, N. D., & Poteshman, A. M. (2007). Option market activity. The Review of Financial Studies, 20(3), 813-857.
15)Latane, H. A., & Rendleman, R. J. (1976). Standard deviations of stock price ratios implied in option prices. The Journal of Finance, 31(2), 369-381.
16)Ni, S. X., Pan, J., & Poteshman, A. M. (2008). Volatility information trading in the option market. The Journal of Finance, 63(3), 1059-1091.
17)Orlando, G., & Taglialatela, G. (2017). A review on implied volatility calculation. Journal of Computational and Applied Mathematics, 320, 202-220.
18)Pan, J., & Poteshman, A. M. (2006). The information in option volume for future stock prices. The Review of Financial Studies, 19(3), 871-908.
19)Patell, J. M., & Wolfson, M. A. (1981). The ex ante and ex post price effects of quarterly earnings announcements reflected in option and stock prices. Journal of Accounting Research, 434-458.
20)Schmalensee, R., & Trippi, R. R. (1978). Common stock volatility expectations implied by option premia. The Journal of Finance, 33(1), 129-147.
21)Scholes, M., & Williams, J. (1977). Estimating betas from nonsynchronous data. Journal of financial economics, 5(3), 309-327.
22)Sheikh, A. M., & Ronn, E. I. (1994). A characterization of the daily and intraday behavior of returns on options. The Journal of Finance, 49(2), 557-579.
23)Stephan, J. A., & Whaley, R. E. (1990). Intraday price change and trading volume relations in the stock and stock option markets. The Journal of Finance, 45(1), 191-220.
24)Trippi, R. R. (1977). Estimating the relationship between price and time to sale for investment property. Management Science, 23(8), 838-842.