Option-implied skewness: Insights from ITM-options
68 Pages Posted: 22 Aug 2019 Last revised: 4 Mar 2024
Date Written: August 20, 2019
Abstract
While the standard to calculate model-free option-implied skewness (MFIS) relies on out-of-the-money (OTM) options, we examine the empirical and economic implications of using in-the-money (ITM) options. We find that the positive short-term return predictability of OTM-based MFIS significantly reverses if ITM-options are used instead. While this reversal is inconsistent with an explanation based on skewness preferences, MFIS apparently reflects information that is not timely incorporated in stock prices due to market frictions. Based on these insights, we introduce Delta-MFIS as a new measure of additional option-embedded information that significantly predicts subsequent returns beyond a large range of other option-based return predictors.
Keywords: Option-Implied Moments, Risk-Neutral Density, Demand-Based Option Pricing
JEL Classification: G13, G14
Suggested Citation: Suggested Citation