Expected option returns during the post-GFC era

ABSTRACT We investigate whether the option implied volatility predicts the future realised volatility of the underlying securities and whether volatility risk factors exploited from options are pricing factors. Our sample includes six popular stock indices such as the S&P 500 and S&P 100 and their options from January 2007 to November 2017. We find option implied volatility of every stock index is positively related to future realised volatility. Return distributions of index call and put contracts exhibit similar a pattern with previous studies, with positive (negative) average call (put) return and highly skewed. Zero-beta straddle portfolio containing long position in one at-the-money call and put index option reports negative average monthly returns and becomes less negative over time. We find the market risk factor is a significant risk factor while the straddle return is an insignificant pricing factor.