Working Paper

Are Equity Option Returns Abnormal? IPCA Says No

Abstract: We show that much of the profitability in equity option return strategies, which try to capture option mispricing by taking exposure to underlying volatility, can be explained by an IPCA model. The alpha reduction, relative to competing static factor models, is between 50% and 75% depending on the computing model and the type of option position.

Keywords: option returns; IPCA; Alpha;

JEL Classification: G11; G12; G13;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2022-08-26

Number: 2214