Earnings Disagreement Dispersion Trading with Options

Summary

This document outlines a dispersion trade using options on constituents of the S&P 100 and options on the index. The research concept measures disagreement in analyst earnings forecasts, scaled by an earnings-uncertainty measure, and sorts stocks into groups each month. The described strategy buys puts on stocks with the greatest disagreement and sells index puts, with the source study specifying a range of index option deltas.

The code implementation differs from that research description because the required forecast data is unavailable: it selects a set of liquid US stocks, buys their at-the-money puts, and sells an SPX at-the-money put. It uses options with roughly three to eight weeks to expiry and rebalances near index-option expiration. The document provides implementation mechanics, not backtest results or evidence that either version is profitable; the proxy selection and omitted forecast signal limit its fidelity to the stated research approach.

Key ideas

• The research strategy sorts stocks by analyst earnings forecast disagreement scaled for uncertainty.
• It buys puts on high-disagreement stocks while selling index puts.
• The implementation substitutes liquid US stocks for forecast-ranked constituents because forecast data is unavailable.
• The code uses at-the-money options and rebalances around index-option expiration.
• No performance results are reported, and the implemented version is only a proxy for the research concept.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.