We propose a novel method of estimating default probabilities using equity option data. The resulting default probabilities are highly correlated with estimates of default probabilities extracted from CDS spreads, which assume constant recovery rates. Additionally, the option implied default probabilities are higher in bad economic times and for rms with poorer credit ratings and nancial positions. An inferred recovery rate, after controlling for liquidity eects, is also related to underlying business and rm conditions, varies across sectors and predicts subsequent equity returns. Joint with Jennifer Conrady and Allaudeen Hameed.