Maturity Driven Mispricing of Options

Options on US equities typically expire on the third Friday of each month, which means that either four or five weeks elapse between two consecutive expiration dates. We find that options that are held from one expiration date to the next achieve significantly lower weekly adjusted returns when there are four weeks between expiration dates. We argue that this mispricing is due to investor inattention and provide further supporting evidence based on earnings announcement dates and price patterns closer to maturity. The results remain strongly significant controlling for a large set of option and stock characteristics, and are robust to various subsamples and estimation procedures. Our findings have potentially important implications for calibrating option pricing models as well as for extracting information from option prices to forecast future variables.