Abstract
This paper examines the cross-section of delta-hedged equity option returns, which are found to be predictable by some characteristics of options and those of their underlying stocks. Using the LASSO method to evaluate the forecasting ability of a large set of predictor candidates, we identify the dominant characteristics that provide incremental information for delta-hedged option returns. These characteristics are robustly selected by different modifications of the LASSO method, using various tunning parameters, across hundreds of bootstrap samples, and over different time periods. The parsimonious models consisting of the dominant characteristics demonstrate superior performance in predicting delta-hedged option returns out-of-sample.
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