A New Index of Option Implied Absolute Deviation

Abstract

This paper proposes of new index of forward looking absolute deviation extracted from option prices. The new index, named ADIX, is model-free and easy to compute using at-the-money straddle prices. An empirical analysis using S&P 500 options data for the time period 1996-2019 reveals that ADIX has similar behavior to VIX in terms of time series dynamics, risk premiums and forecasting ability. The new index offers an alternative risk measure, more intuitive as a measure of dispersion, to study information embedded in option prices.

Keywords: straddle, option implied absolute deviation

JEL Classification: G12, G13