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A recent empirical study (Constantinides et al, 2011) documents that S&P 500 Index call options are frequently over-priced in the sense that any rational agent can improve her expected utility by writing these calls. This article proposes a rational explanation for this puzzling finding. First, I theoretically show how heterogeneous beliefs on both expected return and volatility generate over-pricing of call options. Second, I propose a new methodology to empirically investigate thedoi:10.2139/ssrn.2024254 fatcat:uf7xhdwe6rbsdelwbda4h7rcsm