Variation in Option Implied Volatility Spread and Future Stock Returns
Posted: 20 May 2020
Date Written: March 1, 2020
Equity option markets exhibit intense trading activity. We use the variability of option implied volatility spread as a proxy for the impounding of new information, and changes in the interpretation of existing information, into option prices. Over the 2006 – 2016 period, we find that the predictive power of option implied volatility spread for future stock returns is significantly greater when implied volatility spread has been more variable in the past. Our results are statistically and economically significant and robust in both univariate and multivariate settings.
Keywords: options, implied volatility spread, information, stock returns
JEL Classification: G11, G13, G14
Suggested Citation: Suggested Citation