Option implied beta and option return

Samuel Yau Man Ze-To*

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    Abstract

    We study the information content of option-implied betas for future equity option returns, using data on the S&P 500 index options and all of the component stock options. We find a significantly strong relation between option-implied betas and option returns cross-sectional. The paper presents evidence that call (put) option returns increase (decrease) with the option-implied betas of the underlying stock. A trading strategy of buying high (low) implied beta call (put) option portfolio and selling low (high) implied beta call (put) option portfolio generates a statistically and economically significant return. Our results are robustly persistent even after controlling for various cross-sectional effects and are not explained by the risk factors in asset pricing.

    Original languageEnglish
    Pages (from-to)128-142
    Number of pages15
    JournalApplied Economics
    Volume50
    Issue number2
    Early online date20 Apr 2017
    DOIs
    Publication statusPublished - 8 Jan 2018

    Scopus Subject Areas

    • Economics and Econometrics

    User-Defined Keywords

    • Model-fee implied volatility
    • model-free implied skewness
    • option implied beta
    • option returns

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