Stock Options as Lotteries

57 Pages Posted: 18 Mar 2011 Last revised: 21 Jun 2013

See all articles by Brian H. Boyer

Brian H. Boyer

Brigham Young University - J. Willard and Alice S. Marriott School of Management

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management

Date Written: June 20, 2013

Abstract

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 should be priced. We find, consistent with recent theory, that total skewness exhibits a strong and negative relationship with average option returns. The differences in average returns between low and high skewed options is large, ranging from 10 to 50 per cent per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgable risk when accommodating the relatively high investor demand for lottery-like options.

Keywords: options, skewness, behavioral finance

JEL Classification: G12, G13

Suggested Citation

Boyer, Brian H. and Vorkink, Keith, Stock Options as Lotteries (June 20, 2013). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1787365 or http://dx.doi.org/10.2139/ssrn.1787365

Brian H. Boyer (Contact Author)

Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )

Provo, UT 84602
United States

Keith Vorkink

Brigham Young University - J. Willard and Alice S. Marriott School of Management ( email )

Provo, UT 84602
United States

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