Variation in Option Implied Volatility Spread and Future Stock Returns

Posted: 20 May 2020

See all articles by Jared DeLisle

Jared DeLisle

Utah State University

Dean Diavatopoulos

Seattle University

Andy Fodor

Ohio University

Haim Kassa

Miami University

Date Written: March 1, 2020

Abstract

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

DeLisle, Jared and Diavatopoulos, Dean and Fodor, Andy and Kassa, Haim, Variation in Option Implied Volatility Spread and Future Stock Returns (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3583845

Jared DeLisle

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

Dean Diavatopoulos (Contact Author)

Seattle University ( email )

901 12th Avenue
Seattle, WA 98122
United States

Andy Fodor

Ohio University ( email )

514 Copeland Hall
Athens, OH 45701
United States
740.593.0259 (Phone)

Haim Kassa

Miami University ( email )

800 E. Main St
The Farmer School of Business
Oxford, OH 45056
United States
(513) 529-2057 (Phone)
(513) 556-4891 (Fax)

HOME PAGE: http://fsb.miamioh.edu/kassah

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