Why do option returns change sign from day to night?

Average delta hedged returns for Standard & Poor's 500 index options are large: −0.7% per day. When we decompose these option returns into intraday and overnight components, average close-to-open returns are −1% per day and open-to-close returns are positive, 0.3%. A similar return pattern holds for all maturity and moneyness categories and equity options. These positive intraday returns are particularly difficult to explain. However, our results are consistent with option prices’ failing to account for the well-known fact that stock volatility is substantially higher intraday than overnight. These findings help explain price formation in the options market.