This paper presents a new finding that delta-hedged equity option return decreases with an increase in leverage ratio of the underlying firm, after controlling the firm size. It is robust across puts, calls, and moneyness levels and especially evident for out-of-the-money put options. For the same level of leverage ratio, the delta-hedged equity option return is more negative in a firm where debt is protected by net-worth covenants than that in a firm with debt without these covenants. These results can be explained by a capital structure model, in which the asset value of a firm is driven by a jump-diffusion process and the jump risk is priced. The calibration results of the theoretical model is in line with the empirical evidence.