We show that options written on stocks with low prices are over-priced. This effect is robust to a variety of tests, controlling for common stock- and option- risk characteristics, and to reasonable transaction costs. Natural experiments corroborate this finding; options tend to become...

This paper presents a tractable dynamic equilibrium model of stock return extrapolation in the presence of stochastic volatility. In the model, consistent with survey evidence, following positive (negative) stock returns, investors expect future returns to be higher (lower) but also less (more)...

Divergence in investor beliefs is an important driver of the negative relation between option trading volume and future stock returns. We find a strong negative relation between disagreement-based option trades and future stock returns, and this relation is markedly amplified when the underlying...

Prior literature finds information is reflected in option markets before stock markets using daily and weekly trading volume, but evidence is mixed at the intraday level. Using novel intraday signed option volume data, we develop a composite option trading score (OTS) and document its stock...

The option implied volatility spread and skew predict stock returns. These variables also reflect the expected cost of borrowing stock to sell short. The stock borrowing fee implied from options prices predicts changes in quoted borrowing fees and stock returns; however, the volatility spread...

Motivated by the theory of demand-based option pricing in imperfect markets, we examine the relation between short-sale constraints and equity option returns, conditional on the level of mis-pricing in the underlying stock. We report a monotonic relation between various measures of short-sales...

The term structure of VIX futures is generally upward sloping. The persistent VIX contango may result in abnormally strong performance for VIX futures selling or VIX call writing strategies. However, the high volatility of volatility and significant jump risk may expose short uncovered VIX...

In informationally efficient financial markets, option prices and this implied volatility should immediately be adjusted to new information that arrives along with a jump in underlying's return, whereas gradual changes in implied volatility would indicate market inefficiency. Using...

We develop an ex-ante measure of expected stock returns based on analyst price targets. We then show that ex-ante measures of volatility, skewness, and kurtosis implied from stock option prices are positively related to the cross section of ex-ante expected stock returns. While expected returns...

We use learning in an equilibrium model to explain the puzzling predictive power of the volatility risk premium (VRP) for option returns. In the model, a representative agent follows a rational Bayesian learning process in an economy under incomplete information with the objective of pricing...