Option-implied skewness: Insights from ITM-options

68 Pages Posted: 22 Aug 2019 Last revised: 4 Mar 2024

See all articles by Hannes Mohrschladt

Hannes Mohrschladt

University of Muenster - Finance Center

Judith C. Schneider

Leibniz Universität Hannover - Faculty of Economics and Management

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

Mohrschladt, Hannes and Schneider, Judith C., Option-implied skewness: Insights from ITM-options (August 20, 2019). Available at SSRN: https://ssrn.com/abstract=3439906 or http://dx.doi.org/10.2139/ssrn.3439906

Hannes Mohrschladt (Contact Author)

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/en/the-fcm/lsf/team/hannes-mohrschladt

Judith C. Schneider

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Königsworther Platz 1
Hannover, 30167
Germany

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