C. Jones, H. Mo, T. Wang – “Does Private Information from Options Markets Forecast Aggregate Stock Returns?”

In this paper, we show that the difference between the implied volatilities of call and put options on individual equities has strong predictive power for aggregate stock market returns. This predictability is inconsistent with a rational risk premia or liquidity-based explanation. It is, however, consistent with the implied volatility spread capturing private information, based on its ability to forecast future cash flow growth and discount rate shocks.Read More »


J. Gatheral, I. Matic, Ivan, R. Radoicic, D. Stefanica – “Tighter Bounds for Implied Volatility”

We establish bounds on Black-Scholes implied volatility that improve on the uniform bounds previously derived by Tehranchi. Our upper bound is uniform, while the lower bound holds for most options likely to be encountered in practical applications. We further demonstrate the practical effectiveness of our new bounds by showing how the efficiency of the bisection algorithm is improved for a snapshot of SPX options quotes.Read More »


R.J. McGee, F. McGroarty, “The Risk Premium That Never Was: A Fair Value Explanation of the Volatility Spread”

We present a new framework to investigate the profitability of trading the volatility spread, the upward bias on implied volatility as an estimator of future realized volatility. The scheme incorporates the first four option-implied moments in a growth-optimal payoff that is statically replicated using a portfolio of options. Removing the upward bias on implied volatility worsens the likelihood score of … Read More »


R. Israelov – “Pathetic Protection: The Elusive Benefits of Protective Puts”

Conventional wisdom is that put options are effective drawdown protection tools. Unfortunately, in the typical use case, put options are quite ineffective at reducing drawdowns versus the simple alternative of statically reducing exposure to the underlying asset. This paper investigates drawdown characteristics of protected portfolios via simulation and a study of the CBOE S&P 500 5% Put Protection Index. Unless your option purchases and their maturities are timed just right around equity drawdowns, they may offer little downside protection. In fact, they could make things worse by increasing rather than decreasing drawdowns and volatility per unit of expected return.Read More »


A. Tosi, A. Ziegler, “The Timing of Option Returns”

We document empirically that the returns from shorting out-of-the-money S&P 500 put options are concentrated in the few days preceding their expiration. Back-month options generate almost no returns, and front-month options do so only towards the end of the option cycle. The concentration of the option premium at the end of the cycle reflects changes in options’ risk characteristics. Specifically, … Read More »


N. Branger, H. Hulsbusch, T. F. Middelhoff, “Idiosyncratic Volatility, its Expected Variation, and the Cross-Section of Stock Returns”

This paper explains the negative relation between the realized idiosyncratic volatility (IVOL) and expected returns. Using implicit information from the cross-section of options we extract expectations about the volatility of idiosyncratic volatility (IVOLVOL) in an almost model-free fashion. We show that IVOL is mean-reverting and that IVOLVOL serves as proxy for the meanreversion speed. Running double sorts on both measures … Read More »