Option Return Predictability
60 Pages Posted: 6 Dec 2015 Last revised: 14 Jan 2018
Date Written: April 5, 2017
The cross-section of delta-hedged equity option returns can be predicted by a variety of underlying stock characteristics and firm fundamentals including idiosyncratic volatility, past stock returns, profitability, cash holding, new share issuance, and dispersion of analyst forecasts, although they do not significantly predict stock returns in our sample. We document new option portfolio strategies that are profitable even after transaction costs. These profits are robust and cannot be explained by standard risk factors. The systematic patterns in the relative valuation of options and the underlying stocks we uncover have important implications for option pricing models and option market efficiency.
Keywords: Equity option returns; delta-neutral call writing; predictability; stock characteristics
JEL Classification: G02, G12, G13
Suggested Citation: Suggested Citation