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Option implied beta and option return

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  • Yau Man Ze-To Samuel

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.

Suggested Citation

  • Yau Man Ze-To Samuel, 2018. "Option implied beta and option return," Applied Economics, Taylor & Francis Journals, vol. 50(2), pages 128-142, January.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:2:p:128-142
    DOI: 10.1080/00036846.2017.1313958
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