Option-Based Volatility Timing

We show that a volatility-managed strategy using equity options provides higher alphas, increases Sharpe ratios, and generates significant utility gains for investors, exceeding those of the statistical volatility-managed counterparts. Return and volatility expectations embedded in options prices are particularly effective during intense market uncertainty. Results are robust out-of-sample and across different portfolios based on firms' leverage, size, credit rating, and industry. Investors' lottery preferences are a data-feature in options markets.