The stylized fact that volatility is not priced in individual equity options does not withstand scrutiny. First, we show that the average return of heavily traded deep out‐of‐the‐money call options on stocks is −116 basis points per day. Second, Fama‐MacBeth estimates of the volatility risk premium in stock options are similar to those in S&P 500 Index call options. Third, the mean return of heavily traded delta‐hedged at‐the‐money calls (puts) is −23 (−30) basis points. Fourth, the variance risk premium in stock options is negative. Our analysis highlights the importance of microstructure biases and robustness in empirical work with options.

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure‐based measures of liquidity. Information risk is measured by the probability of information‐based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies.