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Greeks‐Neutral Option Excess Returns

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  • Yaofei Xu
  • Yi Hong
  • Pei Jose Liu
  • Zhendong Zhang

Abstract

This study investigates the linkage between ex‐ante expected greeks‐neutral excess return ( EER GN) and ex‐post realized greeks‐neutral excess return ( RER GN). Employing the top‐down framework, we show that EER GN is determined by the difference between the market‐derived implied volatility and the estimated implied volatility absent arbitrage opportunities. Serving EER GN as the optimal predictor of RER GN, we first find that EER GN positively predicts RER GN. Second, the bottom‐up EER GN complements the top‐down EER GN, enhancing the prediction of RER GN. Third, the 10‐1 portfolios formed on EER GN realize positive excess returns and sizeable Sharpe ratios in the future. The IPCA that employs information from different measures and terms generates superior performance.

Suggested Citation

  • Yaofei Xu & Yi Hong & Pei Jose Liu & Zhendong Zhang, 2025. "Greeks‐Neutral Option Excess Returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(8), pages 1049-1070, August.
    • Handle: RePEc:wly:jfutmk:v:45:y:2025:i:8:p:1049-1070
    DOI: 10.1002/fut.22598
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