Understanding Index Option Returns

The Cash-secured PutWrite Strategy and Performance of Related Benchmark Indexes

“…In contrast, Bakshi and Kapadia [2003] explain option overpricing by a negative volatility risk premium. Still others find that observed option prices are consistent with jump risk premiums and/ or stochastic volatility models (e.g., Broadie, Chernov, and Johannes [2007] and Benzoni, Collin-Dufresne, and Goldstein [2005]). …”

What do we know about individual equity options?

“…However, some potential explanations for the abnormal behavior of index options have appeared in the last years. For instance, Broadie et al () show that index option returns can be explained by models that can generate jump risk premiums or an estimation risk (i.e., when agents cannot estimate parameters and state variables obtained from short samples). Broadie et al (), though, do not provide an economic justification for the existence of such models.…”

Options‐based benchmark indices—A review of performance and (in)appropriate measures

“…Panel A of Table 6 shows significant outperformance at the 5% level for indices that are mostly short options and peaks in BFLY's Jensen's alpha with more than 6% points on an annualized basis. Jensen (1968), my option-factor approach in the spirit of Coval and Shumway (2001), Broadie et al (2009) as well as Goyal and Saretto (2009) and the time-varying beta approaches by Treynor and Mazuy (1966) as well as Henriksson and Merton (1981) based on monthly discrete returns. The initial presumption of vanishing performance in the second-half seems to be confirmed.…”

“…Performance-Straddle-factor modelThis table shows performance measures for the approaches followingJensen (1968) and for my option-factor approach in the spirit ofCoval and Shumway (2001),Broadie et al (2009) as well asGoyal and Saretto …”