Salience Theory and Option Returns

Raymond H. Y. So; Xuanchen Zhang

doi:10.1080/1351847X.2026.2655984

Salience Theory and Option Returns

Raymond H. Y. So
, Xuanchen Zhang

Research output: Contribution to journal › Article › peer-review

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Abstract

In multiple asset classes, the pricing implications of salience theory on cross-sectional asset returns are clouded by informational overlaps with short-term past returns. Leveraging the delta-neutral nature of the delta-hedged option returns, this paper documents the first unclouded evidence of salience theory's impact in the options market. We introduce a new option-based salience theory (OST) value and find its strong negative predictive power for cross-sectional option returns: a long-short portfolio sorted by OST generates a monthly return spread of −0.57% and an annualized Sharpe ratio of 1.86. Our findings support the hypothesis that investors overweight salient past option returns, resulting in the overvaluation of high-OST options. Furthermore, the option salience effect cannot be explained by stock-based short-term reversal or past-month option returns, and is stronger when investor sentiment is high, limits to arbitrage are elevated, and volatility is heightened.

Original language	English
Number of pages	29
Journal	The European Journal of Finance
Early online date	5 Jun 2026
DOIs	https://doi.org/10.1080/1351847X.2026.2655984
Publication status	E-pub ahead of print - 5 Jun 2026

Bibliographical note

Copyright © 2026 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent.

Data Access Statement

The data underlying this article were provided by WRDS under license. Data will be shared on request to the corresponding author with permission from WRDS.

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10.1080/1351847X.2026.2655984Licence: CC BY 4.0

Salience theory and option returns
Copyright © 2026 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent.
Final published version, 2.78 MBLicence: CC BY 4.0

Cite this

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abstract = "In multiple asset classes, the pricing implications of salience theory on cross-sectional asset returns are clouded by informational overlaps with short-term past returns. Leveraging the delta-neutral nature of the delta-hedged option returns, this paper documents the first unclouded evidence of salience theory's impact in the options market. We introduce a new option-based salience theory (OST) value and find its strong negative predictive power for cross-sectional option returns: a long-short portfolio sorted by OST generates a monthly return spread of −0.57\% and an annualized Sharpe ratio of 1.86. Our findings support the hypothesis that investors overweight salient past option returns, resulting in the overvaluation of high-OST options. Furthermore, the option salience effect cannot be explained by stock-based short-term reversal or past-month option returns, and is stronger when investor sentiment is high, limits to arbitrage are elevated, and volatility is heightened.",

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N2 - In multiple asset classes, the pricing implications of salience theory on cross-sectional asset returns are clouded by informational overlaps with short-term past returns. Leveraging the delta-neutral nature of the delta-hedged option returns, this paper documents the first unclouded evidence of salience theory's impact in the options market. We introduce a new option-based salience theory (OST) value and find its strong negative predictive power for cross-sectional option returns: a long-short portfolio sorted by OST generates a monthly return spread of −0.57% and an annualized Sharpe ratio of 1.86. Our findings support the hypothesis that investors overweight salient past option returns, resulting in the overvaluation of high-OST options. Furthermore, the option salience effect cannot be explained by stock-based short-term reversal or past-month option returns, and is stronger when investor sentiment is high, limits to arbitrage are elevated, and volatility is heightened.

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Salience Theory and Option Returns

Abstract

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