Christopher S. Jones

This paper investigates the performance of option investments across different stocks by computing monthly returns on at-the-money straddles on individual equities. It finds that options with high historical returns continue to significantly outperform options with low historical returns over horizons ranging from 6 to 36 months. This phenomenon is robust to including out-of-the-money options or delta-hedging the returns. Unlike stock momentum, option return continuation is not followed by long-run reversal.
Significant returns remain after controlling for implied volatility and other characteristics. Abnormal returns also survive factor risk adjustment. Average option momentum returns are close to zero after paying the full bid-ask spread for options with below-median bid-ask spreads. Across stocks, trading costs are unrelated to the magnitude of momentum profits.

We show that volatility is negatively priced in individual equity options. Consistent with a negative volatility risk premium, the average return of the most heavily traded deep out-of-the-money call options on stocks is negative and economically significant at -73 basis points per day. After adjusting for microstructure biases, a Fama-MacBeth regression indicates that the volatility risk premium in individual equity options is about the same as the premium in S\&P 500 Index call options. Our results highlight the importance of addressing microstructure biases when estimating expected returns and the risk premia of options.

We consider a model in which the correlation between shocks to consumption and to expected future consumption growth is nonzero and varies over time. We validate this assumption empirically using the model's implication that time-variation in consumption growth persistence drives the correlation between stock and bond returns. Consistent with model predictions, we nd that the stock/bond correlation is also related to the volatility of stock returns, the so-called stock market "leverage effect," and the predictive relation between bond yields and future stock returns.