Following the Footprints: Towards a Taxonomy of the Factor Zoo

Option traders pursue exposure to mispriced stocks associated with various crosssectional asset pricing anomalies. Building upon this observation, we formulate an option volume implied mispricing score (OVIMS) that gauges the degree to which an anomaly is linked to stock mispricing. Anomalies in the categories of "momentum" and "profitability" are consistently found among those with high mispricing scores. We replicate stock positions with options and find large price wedges between optionimplied synthetic and physical stock positions for anomalies characterized by high OVIMS. These disparities signify that sophisticated traders strategically employ options to trade against prevailing stock mispricings. For certain high OVIMS anomalies, we find empirical evidence that the demand for options is driven by proprietary traders of financial institutions. Furthermore, our findings indicate that traders build option positions particularly during periods of heightened market frictions, where mispricing is particularly pronounced.