| This dissertation consists of a collection of two essays examining the pricing of risk in the options market. In the first essay, I develop a methodology for calculating returns on portfolios that contain short option positions. The main insight is that short option positions carry a large amount of risk, and entering into such positions therefore requires a substantial margin requirement to protect against large losses. This margin requirement, therefore, not the initial price of the portfolio, constitutes the basis of the return calculation. The second essay examines the pricing of skewness risk in the options market. I examine the returns of portfolios of skewness assets (assets comprised of option and stock positions in a manner such that they isolate the effect of skewness) and find a negative relation between option implied skewness and the returns of the skewness assets. The result empirically confirms the theoretical prediction of a preference for positively skewed assets. |
