Returns from Trading Call Options

Abstract

While much work has been done on pricing of options and expected returns theory, far less has been written on the actual returns that investors receive from trading options. In the case of call options on equity, standard asset pricing theory suggests large, positive average returns, while articles and comments in the popular press suggest that many investors lose money trading options. Empirical results in the academic literature are few, and results are mixed. In this article, I study call option returns, analyzing how returns vary by levels of moneyness and different holding periods for both equity index and individual stock call options. I find a general and consistent result that call option returns are low on average and decreasing in the strike price. Only in-the-money options held for a month exhibit positive returns. Deep out-the-money options deliver large negative returns on average, consistent with risk-seeking investing on the part of buyers. I discuss the implications for some common options trading strategies.