Index Option Returns: Still Puzzling

Previous research indicates mixed conclusions on the potential mispricing of equity index put options. We examine the returns of put writing and other option strategies by comparing historical option returns with returns generated using option pricing models. We find it is generally possible to reject the hypothesis that put returns are consistent with option pricing models. An implication is that the average cost of buying out-of-the-money put options to provide tail-risk protection to a portfolio may include a significant premium. Our results are based on a sample period of 1987-2012 that includes periods of high volatility in equity returns.