A New Look at the Cross-Section of Option Returns and Volatility

This paper re-examines two volatility-related patterns in the cross-section of stock option returns: the low-volatility effect and the expensiveness effect. Intermediary asset pricing theory suggests specific linkages between these effects. As our empirical results show, the low-volatility effect is primarily present for expensive options and the expensiveness effect increases with volatility. In this way, the paper provides new evidence on the role of volatility in the economics of options markets and on the importance of intermediaries and market imperfections. Our results offer potential benefits for investors, as the conditional effects cannot be explained by common risk factors or market inefficiencies