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Stock Option Returns: A Puzzle

51 Pages Posted: 24 Jan 2007  

Sophie X. Ni

Hong Kong University of Science and Technology

Multiple version iconThere are 3 versions of this paper

Date Written: January 9, 2007

Abstract

Under very weak assumptions, the expected returns of European call options must be positive and increasing in the strike price. This paper investigates the returns to call options on individual stocks that do not have an ex-dividend day prior to expiration. The main findings are that over the 1996 to 2005 period (1) out-of-the-money calls have negative average returns and (2) average returns of high strike calls are lower than those of low strike calls. Preliminary evidence is presented that is consistent with investor risk-seeking contributing to the puzzling call returns.

Keywords: Stock Options, Derivatives, Skewness, Risk Seeking

JEL Classification: G12, G13

Suggested Citation

Ni, Sophie X., Stock Option Returns: A Puzzle (January 9, 2007). Available at SSRN: https://ssrn.com/abstract=959024 or http://dx.doi.org/10.2139/ssrn.959024

Sophie Xiaoyan Ni (Contact Author)

Hong Kong University of Science and Technology ( email )

Clearwater Bay
Kowloon
Hong Kong
852-2358 5052 (Phone)

HOME PAGE: http://sophiexni.googlepages.com

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