LAUSR

In model-free out-of-sample tests, we show that the optimal portfolio of a utility-maximizing investor trading in the S&P 500 index, cash, and index options bought at their ask and written at their bid prices stochastically dominates the optimal portfolio without options and yields returns with higher mean and lower volatility in most months over 1990-2013. Unlike earlier claims of overpriced puts, our portfolios include mostly short calls and are particularly profitable when maturity is short and volatility is high. Similar results obtain with the CAC and DAX indices. Neither priced factors nor a non-monotonic stochastic discount factor explain the excess returns.