Cross-Sectional Volatility Factors for Equity Options
Summary
The document describes cross-sectional signals for ranking equity options by potential volatility mispricing. It outlines value, company size, idiosyncratic volatility, beta convexity, implied volatility term structure, the implied versus realized volatility premium, and stock momentum. The proposed interpretation is that options on some types of stocks may be relatively overpriced or underpriced, which could inform long and short positioning.
These are research-based tendencies rather than a complete trading system: the document provides no current performance data, portfolio construction rules, or detailed implementation. It cautions that published option-return studies can overstate practical returns because they may omit short-option margin requirements and assume midpoint fills, especially unrealistic for illiquid contracts. One factor, the implied-realized volatility premium, is described as having weakened over time, underscoring that historical relationships may change.
Key ideas
- Cross-sectional stock characteristics can be used to rank equity options for possible relative mispricing.
- The listed characteristics include value, size, idiosyncratic volatility, beta convexity, volatility term structure, volatility premium, and momentum.
- The document reports tendencies from prior research, not a fully specified strategy or current performance test.
- Margin costs and realistic execution prices can materially reduce apparent returns.
- The implied versus realized volatility signal is said to have lost effectiveness for a period.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.