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Stock Options as Lotteries




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    • Boyer and Vorkink are with The Marriott School of Management, Brigham Young University. We acknowledge financial support from the Harold F. and Madelyn Ruth Silver Fund and Intel Corporation. Vorkink notes support from a Ford research fellowship. We thank Turan Bali, Nick Barberis, Josh Coval, Jefferson Duarte, Danling Jiang, Chris Jones, Don Lien, Francis Longstaff, Grant McQueen, Todd Mitton, Lasse Pedersen, Josh Pollet, Tyler Shumway, Grigory Vilkov, seminar participants at Brigham Young University, Florida State, UC Irvine, UCLA, and the University of Michigan, and conference participants at the 2012 Adam Smith Asset Pricing Conference and the 2012 Western Finance Association Meetings for helpful comments and suggestions. We also thank Greg Adams and Troy Carpenter for research support.


We investigate the relationship between ex ante total skewness and holding returns on individual equity options. Recent theoretical developments predict a negative relationship between total skewness and average returns, in contrast to the traditional view that only coskewness is priced. We find, consistent with recent theory, that total skewness exhibits a strong negative relationship with average option returns. Differences in average returns for option portfolios sorted on ex ante skewness range from 10% to 50% per week, even after controlling for risk. Our findings suggest that these large premiums compensate intermediaries for bearing unhedgeable risk when accommodating investor demand for lottery-like options.