  Measuring beliefs about natural disasters is challenging. Deep
out-of-the-money options allow investors to hedge at a range of strikes and
time horizons, thus the 3-dimensional surface of firm-level option prices
provides information on (i) skewed and fat-tailed beliefs about the impact of
natural disaster risk across space and time dimensions at daily frequency; and
(ii) information on the covariance of wildfire-exposed stocks with investors'
marginal utility of wealth. Each publicly-traded company's daily surface of
option prices is matched with its network of establishments and wildfire
perimeters over two decades. First, wildfires affect investors' risk neutral
probabilities at short and long maturities; investors price asymmetric downward
tail risk and a probability of upward jumps. The volatility smile is more
pronounced. Second, comparing risk-neutral and physical distributions reveals
the option-implied risk aversion with respect to wildfire-exposed stock prices.
Investors' marginal utility of wealth is correlated with wildfire shocks.
Option-implied risk aversion identifies the wildfire-exposed share of
portfolios. For risk aversions consistent with Barro (2012), equity options
suggest (i) investors hold larger shares of wildfire-exposed stocks than the
market portfolio; or (ii) investors may have more pessimistic beliefs about
wildfires' impacts than what observed returns suggest, such as pricing
low-probability unrealized downward tail risk. We calibrate options with models
featuring both upward and downward risk. Results are consistent a significant
pricing of downward jumps.
