| I study excess returns from selling individual equity options that are leverage-adjusted and delta-hedged. I find that options with longer maturities have higher risk yet lower average returns. I identify three new factors---level, slope, and value---in option returns, which together explain the cross-section of expected returns on option portfolios formed on moneyness, maturity, and value. This three-factor model also helps explain expected returns on option portfolios formed on twelve other characteristics. While the level premium appears to compensate investors for market-wide volatility and jump shocks, market frictions help us understand the slope and value premiums. |
