Theoretical models predict that the value of a real option should be increasing in the volatility of the underlying asset. Thus, if real options are economically important, then firm values should be positively related to volatility. Consistent with this prediction, we find evidence that stock returns are contemporaneously positively correlated with changes in volatility. Moreover, this positive relation is stronger for firms that are more likely to have more real options and for firms with more irreversible investment opportunities. Most importantly, we find that the sensitivity of firm values to changes in volatility declines significantly after firms exercise their real options. These results indicate that real options constitute an economically meaningful component of firm values.