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Expected Option Returns
Author(s) -
Coval Joshua D.,
Shumway Tyler
Publication year - 2001
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00352
Subject(s) - straddle , economics , valuation of options , call option , asian option , econometrics , volatility (finance) , moneyness , financial economics , put option , context (archaeology) , capital asset pricing model , implied volatility , volatility smile , black–scholes model , paleontology , biology
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.