To verify that our model can generate the empirically observed patterns in average short index put options, we first computed the average returns for index put options using actual option data on the S&P 500 across different strikes. To this end, we used IvyDB US Optionmetrics. While there are many sources one can use when it comes to performing academic research, we, have done considerable work with OptionMetrics’ IvyDB US database, and it appears to be the most commonly used database for academic research on U.S. index and stock option markets over the past two decades.

We, then, compute returns for the same set of strikes with the learning model. Finally, we compare the calculated average returns from the learning model to the average returns from the historical data. What we find is that the patterns calculated with our learning model are similar to the ones obtained from the historical data from OptionMetrics. This showcases that the empirically observed patterns in short index option returns can be generated by learning about fundamentals.

What should institutional investors take from this research? How should they apply it to their work today?