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Expected Option Returns

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Author Info
Joshua D. Coval
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. Copyright The American Finance Association 2001.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 56 (2001)
Issue (Month): 3 (06)
Pages: 983-1009
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Handle: RePEc:bla:jfinan:v:56:y:2001:i:3:p:983-1009

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  11. Urcola, Hernan A. & Irwin, Scott H., 2006. "Has the Performance of the Hog Options Market Changed?," 2006 Annual meeting, July 23-26, Long Beach, CA 21479, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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