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http://ssrn.com/abstract=1640322
 
 

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Call-Put Implied Volatility Spreads and Option Returns


James S. Doran


Florida State University - Department of Finance

Andy Fodor


Ohio University

Danling Jiang


Florida State University - The College of Business

June 21, 2013

Review of Asset Pricing Studies, 2013(3): 258-290

Abstract:     
Prior literature shows that the implied volatility spread between call and put options is a bullish signal for future returns on the underlying stocks. A common interpretation is that a high call-put implied volatility spread indicates favorable private information revealed by informed option investors. However, this paper finds that a high call-put implied volatility spread is a strong bearish signal for future returns on out-of-the-money call options. Using unique data on daily option volumes, we reconcile the two pieces of seemingly contradicting evidence by showing that demand for options by sophisticated, firm investors drives the positive relationship between volatility spreads and future stock returns, while demand for options by less sophisticated, customer investors drives the negative relationship between volatility spreads and future call option returns. Taken together, our evidence suggests that call-put implied volatility spreads contain information about firm fundamentals as well as option mispricing.

Number of Pages in PDF File: 49

Keywords: Implied Volatility Spread, Stock Returns, Option Returns, Option Demand

JEL Classification: G11, G12

Accepted Paper Series





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Date posted: July 15, 2010 ; Last revised: January 14, 2014

Suggested Citation

Doran, James S. and Fodor, Andy and Jiang, Danling, Call-Put Implied Volatility Spreads and Option Returns (June 21, 2013). Review of Asset Pricing Studies, 2013(3): 258-290. Available at SSRN: http://ssrn.com/abstract=1640322 or http://dx.doi.org/10.2139/ssrn.1640322

Contact Information

James S. Doran
Florida State University - Department of Finance ( email )
Tallahassee, FL 32306-1042
United States
850-644-7868 (Phone)
HOME PAGE: http://garnet.acns.fsu.edu/~jsdoran/
Andy Fodor
Ohio University ( email )
234 Copeland
Athens, OH 45701
United States
740.593.0514 (Phone)
Danling Jiang (Contact Author)
Florida State University - The College of Business ( email )
821 Academic Way
P.O. Box 3061110
Tallahassee, FL 32306-1110
United States
(850)645-1519 (Phone)
HOME PAGE: http://mailer.fsu.edu/~djiang/
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