Options-implied information and the momentum cycle

We employ options-implied information derived from implied volatility spreads and implied volatility skews to identify the momentum stage of stocks. We show that the early-stage (late-stage) momentum strategy of buying identified early-stage (late-stage) winners and selling identified early-stage (late-stage) losers outperforms (underperforms) the conventional momentum strategy of buying winners and selling losers across all momentum stages. We also find that the price momentum of the early-stage (late-stage) momentum strategy experiences slower (faster) reversal than that of the conventional momentum strategy. The outperformance of the early-stage momentum strategy comes primarily from the contribution of losers, as options-implied measures better place losers in their momentum stages than winners. Moreover, the identification ability of options implied measures increases with the informativeness of the options market and, more importantly, is driven by their predictive information about a firm's fundamentals, particularly for profitability. Overall, our results indicate that options-implied information is useful in identifying the momentum stages of stocks. (c) 2020 Elsevier B.V. All rights reserved.