TY - JOUR T1 - Value for Equity Index Options: Expected—Not Realized—Volatility and the Distribution of Forecasts JF - The Journal of Portfolio Management DO - 10.3905/jpm.2022.1.427 SP - jpm.2022.1.427 AU - J. Benson Durham Y1 - 2022/09/19 UR - https://pm-research.com/content/early/2022/09/19/jpm.2022.1.427.abstract N2 - Models of option returns neglect the distribution of expected asset volatility, unfortunately for not only derivatives traders but also investors who monitor options as fear gauges. Six common GARCH (generalized autoregressive conditional heteroskedasticity) models afford estimates of the physical, rather than the risk-neutral, distribution of anticipated—instead of historical—volatility, as well as of volatility disagreement. This value specification covering nine global equity indexes and five expiries from one to 12 months fits implied volatilities closely, with sizeable and robust error-correction speeds out of sample, all else equal. Exploratory backtests of delta-neutral trading rules produce high Sharpe ratios and alphas, with modest drawdowns and skew. ER -