Doctor of Philosophy (PhD)



Document Type



It is widely accepted that the value of an option is an increasing function of the underlying volatility. The positive relation between volatility and option price is intuitive only if we keep all other determinants of the option value constant, including the stock price. The notion that an asset price is completely unaffected by the volatility of the asset is virtually unacceptable in asset pricing theory and holds only in a stylized one-factor world in which the volatility change is completely diversifiable. In Chapter 1, I examine the role of the non-zero correlation of the underlying asset return and its volatility in the sensitivity of the option value with respect to the underlying volatility.

I propose a new measure for the option’s sensitivity to the underlying volatility that accounts for the indirect effect of volatility on the option value through the correlation of the asset return and the volatility, in addition to the direct effect of the volatility on the option value, captured by the traditional Black-Scholes-Merton vega. I numerically show that although idiosyncratic volatility is beneficial to the value of a call option, systematic volatility can have a detrimental effect. I specify a condition, under which call option value decreases with the volatility of the underlying asset.

In Chapter 2, I examine a large set of potential determinants of expected option returns to identify the characteristics that can predict the expected returns of individual equity options. I use the adaptive least absolute shrinkage and selection operator (LASSO) to select the characteristics that provide independent information for the cross-section of options returns. Based on the selected characteristics, I suggest new profitable option portfolio strategies. The systematic patterns in the valuation of options relative to the identified characteristics offer important implications for option market efficiency, as well as option pricing models. Finally, I propose a set of tradable option portfolio strategies based on the identified characteristics that yield average monthly out-of-sample return of up to 1.12%.



Committee Chair

Chance, Don

Available for download on Monday, March 16, 2026