We study whether the idiosyncratic momentum strategy can generate excess returns following the emergence of traded options. We find that idiosyncratic momentum profits show attenuation since options started trading in 1996. Our results show that momentum returns for stocks with options in idiosyncratic momentum are positive and significant for three, six, and twelve months following the formation date, while those for stocks with options in traditional momentum are insignificant or even turn to negative. We also find strong evidence that the enhanced information efficiency led by allowing short selling has more impacts on traditional momentum returns than on idiosyncratic momentum returns. Overall, our results show that the idiosyncratic momentum strategy demonstrate an even bigger challenge to the conventional asset pricing literature.​

Keywords: Traditional momentum, idiosyncratic momentum, stock option trading, short sale constraints
JEL codes: G40, G14​