June 6, 2020
We uncover new return predictability in the cross-section of delta-hedged equity options. Expected returns of writing delta-hedged calls are negatively correlated with current stock price, firm profit margin and profitability, but positively correlated with firm cash holding, cash flow variance, new shares issuance, total external financing, distress risk, and dispersion of analyst forecasts. We develop ten option portfolio strategies that have annual Sharpe ratios above three and remain profitable after transaction costs.