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- Title
Option Return Predictability.
- Authors
Zhan, Xintong (Eunice); Han, Bing; Cao, Jie; Tong, Qing
- Abstract
We uncover new return predictability in the cross-section of delta-hedged equity options. Expected returns to writing delta-hedged calls are negatively correlated with stock price, profit margin, and firm profitability, but positively correlated with cash holding, cash flow variance, new shares issuance, total external financing, distress risk, and dispersion of analysts' forecasts. Our option portfolio strategies have annual Sharpe ratio above two and remain profitable after transaction costs. Their profits can be explained by two option factors, while equity risk factors have no explanatory power. We find support for several economic channels at work, yet the option return predictability remains puzzling.
- Subjects
OPTIONS (Finance); EXPECTED returns; STOCK prices; PROFIT margins; PROFITABILITY; TRANSACTION costs
- Publication
Review of Financial Studies, 2022, Vol 35, Issue 3, p1394
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhab067