Expected Option Returns

Posted: 16 Oct 2000

See all articles by Joshua D. Coval

Joshua D. Coval

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

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.

Suggested Citation

Coval, Joshua D. and Shumway, Tyler, Expected Option Returns. Journal of Finance, Available at SSRN: https://ssrn.com/abstract=239435

Joshua D. Coval

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tyler Shumway (Contact Author)

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)

HOME PAGE: http://www.umich.edu/~shumway

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,476
PlumX Metrics