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Volatility and expected option returns: A note

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  • Chaudhury, Mo

Abstract

We show analytically that the relationship between asset volatility and expected option return is ambiguous. Numerical results elaborate how the direction and magnitude of the relationship depend on asset beta and volatility levels, and option moneyness and maturity.

Suggested Citation

  • Chaudhury, Mo, 2017. "Volatility and expected option returns: A note," Economics Letters, Elsevier, vol. 152(C), pages 1-4.
    • Handle: RePEc:eee:ecolet:v:152:y:2017:i:c:p:1-4
    DOI: 10.1016/j.econlet.2016.12.014
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    References listed on IDEAS

    as
    1. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    2. Herskovic, Bernard & Kelly, Bryan & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2016. "The common factor in idiosyncratic volatility: Quantitative asset pricing implications," Journal of Financial Economics, Elsevier, vol. 119(2), pages 249-283.
    3. Goyal, Amit & Saretto, Alessio, 2009. "Cross-section of option returns and volatility," Journal of Financial Economics, Elsevier, vol. 94(2), pages 310-326, November.
    4. Mark Broadie & Mikhail Chernov & Michael Johannes, 2009. "Understanding Index Option Returns," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4493-4529, November.
    5. Cao, Jie & Han, Bing, 2013. "Cross section of option returns and idiosyncratic stock volatility," Journal of Financial Economics, Elsevier, vol. 108(1), pages 231-249.
    6. repec:bla:jfinan:v:59:y:2004:i:5:p:1957-1978 is not listed on IDEAS
    7. Joshua D. Coval & Tyler Shumway, 2001. "Expected Option Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 983-1009, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Stephan Höcht & Dilip B. Madan & Wim Schoutens & Eva Verschueren, 2021. "It Takes Two to Tango: Estimation of the Zero-Risk Premium Strike of a Call Option via Joint Physical and Pricing Density Modeling," Risks, MDPI, vol. 9(11), pages 1-19, November.
    2. Doojin Ryu & Jinyoung Yu, 2021. "Informed options trading around holidays," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(5), pages 658-685, May.
    3. Fullwood, Jonathan & James, Jessica & Marsh, Ian W., 2021. "Volatility and the cross-section of returns on FX options," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1262-1284.

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    More about this item

    Keywords

    Volatility; Expected option return; Cross-section of option returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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