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Stock Options as Lotteries

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  • BRIAN H. BOYER
  • KEITH VORKINK

Abstract

type="main"> We investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness and average returns, in contrast to the traditional view that only coskewness is priced. We find, consistent with recent theory, that total skewness exhibits a strong negative relationship with average option returns. Differences in average returns for option portfolios sorted on ex ante skewness range from 10% to 50% per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgeable risk when accommodating investor demand for lottery-like options.

Suggested Citation

  • Brian H. Boyer & Keith Vorkink, 2014. "Stock Options as Lotteries," Journal of Finance, American Finance Association, vol. 69(4), pages 1485-1527, August.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:4:p:1485-1527
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    File URL: http://hdl.handle.net/10.1111/jofi.12152
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