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Option-implied skewness: Insights from ITM-options

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  • Mohrschladt, Hannes
  • Schneider, Judith C.

Abstract

While the standard to calculate model-free option-implied skewness (MFIS) relies on out-of-the-money (OTM) options, we examine the empirical and economic implications of using in-the-money (ITM) options. We find that the positive short-term return predictability of OTM-based MFIS significantly reverses if ITM-options are used instead. While this reversal is inconsistent with an explanation based on skewness preferences, MFIS apparently reflects information that is not timely incorporated in stock prices due to market frictions. Based on these insights, we introduce ΔMFIS as a new measure of additional option-embedded information that significantly predicts subsequent returns beyond a large range of other option-based return predictors.

Suggested Citation

  • Mohrschladt, Hannes & Schneider, Judith C., 2021. "Option-implied skewness: Insights from ITM-options," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:dyncon:v:131:y:2021:i:c:s0165188921001627
    DOI: 10.1016/j.jedc.2021.104227
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    More about this item

    Keywords

    In-the-money-options; Option-implied skewness; Return predictability; Market frictions;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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