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Can Equity Option Returns Be Explained by a Factor Model? IPCA Says Yes

Author

Listed:
  • Amit Goyal
  • Alessio Saretto

Abstract

A number of delta-hedged equity option strategies exhibit very large average returns. We show that much of the profitability of these strategies can be explained by an IPCA factor model. The economic magnitude of the return-adjustment produced by IPCA is impressive: even before transaction costs, the average IPCA alpha of 46 long-short trading strategies constructed on previously discovered signals, is close to zero and contrasts with average realized returns of over 80 basis points per month. Our IPCA model can be used as a benchmark for assessing the performance of other option portfolios.

Suggested Citation

  • Amit Goyal & Alessio Saretto, 2025. "Can Equity Option Returns Be Explained by a Factor Model? IPCA Says Yes," The Review of Financial Studies, Society for Financial Studies, vol. 38(6), pages 1783-1821.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:6:p:1783-1821.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae087
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    More about this item

    Keywords

    G11; G12; G13;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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