Stock returns on option expiration dates: Price impact of liquidity trading

• We document stock returns on option expiration dates.
• Stocks with large amounts of deeply in-the-money call options earn−0.8% daily returns on expiration dates.
• We attribute the negative returns to the selling pressure in the stock market.
• Selling pressure is from call option buyers exercising deeply in-the-money calls and selling the acquired stocks immediately.
• This selling pressure is not offset by option writers' purchases or put option rebalancing.

This paper documents striking evidence that stocks with a sufficiently large amount of deeply in-the-money call options experience a significant return drop of 0.8 percentage point on option expiration dates; this price movement is then followed by a short-term reversal. We attribute the negative returns to the selling pressure from call option buyers who exercise deeply in-the-money calls and sell the acquired stocks immediately. This selling pressure is offset neither by parallel option writers' purchases nor by put option rebalancing on the opposite end.