We document that the leverage-adjusted returns on S&P 500 index calls and puts are decreasing in their strike-toprice ratio over 1986-2007, contrary to the prediction of the Black-Scholes-Merton model; and the leverageunadjusted returns on S&P 500 index calls are decreasing in their strike-to-price ratio, contrary to the prediction and empirical results of Coval and Shumway (2001). Several factor models are tested and fail to explain the crosssection of option returns. Two option-specific factors, the change in monthly OTM put volume and the change in the VIX index, have some explanatory power when the factor premia are estimated from the universe of options but large alphas remain when the premia are estimated from equities. The three Fama-French factors leave large alphas even when the premia are estimated from options.