Expected Option Returns and the Structure of Jump Risk Premia

The paper analyzes expected option returns in models with stochastic volatility and jumps. A comparison with empirically documented returns shows that the ability of the model to explain these returns can differ significantly depending on the holding period and depending on whether we consider call or put options. Furthermore, we show that the size of the jump risk premium and its decomposition into a premium for jump intensity risk, jump size risk, and jump variance risk has a significant impact on expected option returns. In particular, expected returns on OTM calls can even become negative if e.g. jump variance risk is priced.