This paper studies pricing kernels and their relation to jump and variance premia in an intermediary-based index option pricing model. After solving the model using neural nets, I show that when market makers net sell options, the pricing kernel is U-shaped in underlying returns. This result is primarily driven by the market maker’s inability to perfectly hedge large movements, or jumps, in underlying returns. The model thus provides a joint explanation for historically observed U-shaped kernels, large jump premia for upward and downward jumps in the market, and expensive out-of-the-money calls and puts which pay off under large upward and downward jumps, respectively. Changes in the market maker’s financial standing generate changes in the pricing of jump risk, for both upward and downward jumps, that are consistent with the model. Changes in end user demand since the financial crisis are consistent with a disappearance of the U shape in the pricing kernel and a decrease in option prices, as predicted by the model.