The cross-section of individual equity option returns¶
Bibliographic record. Follow the original-source link for the publication.
| Field | Value |
|---|---|
| Primary domain | Option Returns |
| Other domains | Volatility, Hedging Exposure Risk, Microstructure |
| Methods | Research Methods |
| Facets | Instrument Single Stock Options |
| Authors | Mobina Shafaati, Don M. Chance, Robert Brooks |
| Published | 2026-06-25 |
| Source | Journal of Empirical Finance |
| Identifiers | doi:10.1016/j.jempfin.2026.101748 |
| URL | Open original source |
Editorial synthesis¶
Why it matters¶
The study offers an interpretable sparse-model baseline for individual-equity option returns, examining both forecast performance and whether selected characteristics survive resampling and reselection. It is useful for feature evaluation in delta-hedged option-return research, not as a model of two-leg terminal payoffs, max-loss-normalized returns, or an executable trading strategy. (full_text:S27, full_text:S136, full_text:S138, full_text:S179, full_text:S385)
Main author claims¶
- The authors start with 100 stock/firm and 30 option characteristics, remove 22 highly collinear variables, and apply LASSO to monthly cross-sectional ranks. They repeat selection and post-selection Fama–MacBeth estimation across 1,000 resamples of whole months. Historical-minus-implied volatility (hv_iv) and idiosyncratic volatility are selected in every resample, and turnover in roughly 98%–100%. Conditional on the other selected predictors, hv_iv and turnover have positive associations with subsequent delta-hedged returns, while idiosyncratic volatility has a negative association. (
full_text:S27,full_text:S108,full_text:S137,full_text:S138,full_text:S230,full_text:S232,full_text:S256,full_text:S271,full_text:S273,full_text:S282) - The authors report: In Table 5, the authors reselect and re-estimate models in rolling 120-month training windows and report 159 monthly out-of-sample forecasts. Adaptive LASSO with BIC gives realized-on-predicted slopes of 0.979 for calls and 1.045 for puts, with cross-sectional regression R-squared near 2.1% for both. Predicted-return decile high-minus-low portfolios have annualized Sharpe ratios of 3.351 and 4.228. The higher reported maxima of 3.929 and 4.723 use other penalty settings; they should not be conflated with BIC performance or interpreted as evidence of returns net of full execution costs. (
full_text:S398,full_text:S399,full_text:S402,full_text:S408,full_text:S409,full_text:S410,full_text:S416,full_text:S177) - The authors' double sorts associate larger hv_iv return spreads with information frictions, demand pressure, and illiquidity, while idiosyncratic-volatility spreads strengthen under several arbitrage and hedging-friction proxies. Turnover behaves differently, with stronger patterns in volatile and smaller-stock segments rather than a consistent arbitrage-cost pattern across liquidity proxies. These are conditional associations compatible with proposed mechanisms, not causal identification of those mechanisms. (
full_text:S460,full_text:S462,full_text:S480,full_text:S486,full_text:S528,full_text:S529,full_text:S530)
Data, method, or discussion scope¶
The main paper uses US individual-equity options from 1996–2019, combining OptionMetrics, CRSP, Compustat, and I/B/E/S, with approximately 200,000 call and 160,000 put contract-month observations. It retains near-ATM calls and puts per stock where available. Actual initial maturities are 37–52 days; positions are held for approximately one month with daily delta rebalancing, not to expiry. Returns divide hedged gains by the absolute initial net cash position |O₀−Δ₀S₀|, not the premium, margin, or maximum loss. Annual and quarterly accounting inputs are lagged six and four months. First online publication was 2026-06-25, not the end of the empirical sample. (full_text:S21, full_text:S141, full_text:S144, full_text:S145, full_text:S159, full_text:S170, full_text:S174, full_text:S175, full_text:S177, full_text:S179, full_text:S205, full_text:S218)
Main limitations¶
Table 6 fixes characteristics using the full-sample bootstrap and only rolls coefficient estimation, giving feature choice a hindsight advantage; it is not the rolling-reselection design of Table 5. The main text does not establish whether Table 5 also repeats VIF pruning within each training window or how CV folds respect time. Reported R-squared comes from cross-sectional regressions with an intercept, not forecast-error OOS R-squared against zero returns; a slope near one alone does not establish unbiasedness. Returns use bid/ask midpoints and deduct risk-free financing, but the main paper does not report portfolios net of spreads, daily hedge execution, stock borrowing, margin constraints, and impact. Resampling whole months preserves within-month dependence, not serial dependence across months, and does not automatically establish coverage for nonregular post-selection intervals. Double sorts do not identify causality, and the historical ATM monthly sample does not establish validity for today's full option surface, 0DTE, or two-leg combinations. All 25 supplied pages were read; the separate Online Appendix was unavailable, and the authors' data and code were not independently replicated. (full_text:S52, full_text:S53, full_text:S137, full_text:S140, full_text:S145, full_text:S175, full_text:S177, full_text:S179, full_text:S205, full_text:S230, full_text:S231, full_text:S239, full_text:S386, full_text:S404, full_text:S405, full_text:S411, full_text:S441, full_text:S460, full_text:S553)
Relationships¶
- None recorded.