We show that option market risk is highly persistent over time and propose a cross-sectional option momentum strategy to exploit this pattern. Our proposed systematic momentum is highly profitable for di↵erent formation and holding pe- riods, and it is more profitable than the recently discovered option momentum strategy of Heston et al. (2023). We show further that the systematic option mo- mentum is unrelated to standard option momentum, is not subject to crash risk, and does not su↵er from long-term reversals. We also examine various components of the risk drivers of the strategy and find that fundamental risks are generally well compensated to those investors who trade on the risk-based momentum.

This paper studies the tendency of forward rates to systematically overestimate future spot rates in the bond market through the lens of a strategy that pays the floating rate in exchange for the fixed rate over a long-term holding period. We name this strategy the “hairy strategy” because the overshooting behaviour of forward rates looks like hairs spread out over time. Since the late 80s, the hairy strategy based on 10-year US interest rates swaps has generated a hairy premium of 2.7% per annum, with a minimum of 0.6% and a maximum of 4.7%. The hairy premium remains sizeable to using more than a century’s worth of US data and also holds for other major countries. We document that 45% of the Hairy premium variation can be explained by a single global factor, while 14% can be attributed to the conventional empirical term premium. Unlike the conventional empirical term premium, moreover, the Hairy pre- mium exhibits a countercyclical dynamic that is positively related to recessions and negatively to inflation expectations, thus providing a hedge during bad times.

We document a large and robust monthly cyclical pattern in option prices. The implied volatilities (IVs) of non-expiring options tend to rise prior to, and decline after the third Friday of each month -- the standard expiration day for stock option contracts. The magnitude of this monthly IV cycle is large, averaging approximately 2% in absolute terms. Evidence supports an explanation featuring supply-side frictions coupled with monthly demand fluctuations due to rollover activities. Over time, this IV cycle becomes more pronounced during periods of higher market risk, increased risk aversion, or more stringent constraints on intermediaries' capital. Cross-sectionally, stocks with higher option rolling demand and lower option trading costs experience larger IV cycles. A delta-neutral straddle strategy exploiting this cycle yields up to 10.25% return per month.