Equity Volatility Term Structures and the Cross-Section of Option Returns

The slopeof the implied volatilityterm structure is positively related to future option returns. We rank firms based on the slopeof the volatility term structure and analyze the returns for straddle portfolios. Straddle portfolioswith high slopesof the volatility term structure outperform straddle portfolioswith low slopesby an economically and statistically significant amount. The results are robust to different empirical setups and are not explained by traditional factors, higher-order option factors, or jump risk.