Expected Option Returns
Joshua D. Coval
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)
University of Michigan at Ann Arbor, The Stephen M. Ross School of Business
Journal of Finance
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.
Accepted Paper Series
Date posted: October 16, 2000
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