The asymmetry in day and night option returns: Evidence from an emerging market

Abstract

Delta-hedged option selling strategies typically yield positive returns, owing to the volatility risk premium embedded in the option price. Recent research based on S&P 500 options has found a day–night asymmetry in option returns. We find a similar disparity in the returns for short Nifty option strategies. Positive and significant overnight option returns are accompanied by negative intraday returns. The day–night asymmetry is robust across option categories and subsamples but weaker on days with significant jumps in the underlying. We confirm that the variance risk premium earned by option sellers is mainly a reward for overnight risk.