Uncertainty of Put-Call Parity Violation and Option Returns

This paper presents a new robust predictor for option returns: the uncertainty of put-call parity violation (VVS). We find that the delta-hedged equity option return decreases monotonically with VVS. Although VVS is highly correlated with the classical uncertainty and limit-to-arbitrage measures, the predictability still cannot be explained by standard factors such as jump and volatility risks, short-sale constraints, and stock lottery characteristics. It is also inconsistent with constrained option market makers, since the results are almost similar after controlling for market makers' order flows.

Keywords: Option returns, put-call parity violation, volatility-of-volatility

JEL Classification: G10, G12, G13

Suggested Citation: Suggested Citation

Liu, Chun and Liu, Chun and Wang, Tianyu and Wang, Yintian and Xiang, Hong, Uncertainty of Put-Call Parity Violation and Option Returns (May 1, 2022). Available at SSRN: https://ssrn.com/abstract=4177394 or http://dx.doi.org/10.2139/ssrn.4177394