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Information content of right option tails: Evidence from S&P 500 index options

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  • Greg Orosi

Abstract

In this study, we investigate how useful the information content of out-of-the-money S&P 500 index call options is to predict the size and direction of the underlying index for the period 2004–2013. First, we demonstrate that behavior of the right tail of the option-implied risk-neutral distribution can be characterized by a single parameter. Subsequently, we find that weekly changes in the tail parameter can be used to devise trading strategies that are likely to outperform the underlying index on a risk-adjusted basis. Moreover, we demonstrate that even during a period when the strategies do not outperform the index, our approach can be used to obtain information about future index returns.

Suggested Citation

  • Greg Orosi, 2017. "Information content of right option tails: Evidence from S&P 500 index options," Journal of Asset Management, Palgrave Macmillan, vol. 18(7), pages 516-526, December.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:7:d:10.1057_s41260-017-0049-4
    DOI: 10.1057/s41260-017-0049-4
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    References listed on IDEAS

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    1. DeMiguel, Victor & Plyakha, Yuliya & Uppal, Raman & Vilkov, Grigory, 2013. "Improving Portfolio Selection Using Option-Implied Volatility and Skewness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(6), pages 1813-1845, December.
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    More about this item

    Keywords

    trading strategy; option-implied information; performance evaluation;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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