Keywords

option returns, strike price effects, stochastic volatility

Abstract

This paper examines expected option returns in the context of mainstream asset pricing theory. Under mild assumptions, expected call returns exceed those of the underlying security and increase with the strike price. Likewise, expected put returns are below the risk-free rate and increase with the strike price. S&P index option returns consistently exhibit these characteristics. Under stronger assumptions, expected option returns vary linearly with option betas. However, zero-beta, at-the-money straddle positions produce average losses of approximately three percent per week. This suggests that some additional factor, such as systematic stochastic volatility, is priced in option returns.

Original Publication Citation

Expected Option Returns, 2001, with Joshua Coval, Journal of Finance

Document Type

Peer-Reviewed Article

Publication Date

2000

Publisher

Journal of Finance

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

Download

Share

COinS