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The Dynamics of Option Volatility Smirk and Option Returns Predictability: Evidence From Chinese SSE50 ETF Options

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Listed:
  • Wenxin Guo
  • Dehong Liu
  • Carl R. Chen
  • Peter Lung

Abstract

We examine the predictive ability of risk‐neutral moments extracted from option volatility smirks for the option delta‐neutral returns using the SSE50 ETF stock index option. We find risk‐neutral skewness changes over market conditions. The risk‐neutral skewness significantly predicts 1‐day, 2‐day, and 1–4 weeks ahead call option returns with negative signs in both in‐sample and out‐of‐sample tests. The results are robust in including other control variables and different constant maturity risk‐neutral skewnesses. Trading strategies based on the predictive model yield a potential maximum annual return of 293%.

Suggested Citation

  • Wenxin Guo & Dehong Liu & Carl R. Chen & Peter Lung, 2025. "The Dynamics of Option Volatility Smirk and Option Returns Predictability: Evidence From Chinese SSE50 ETF Options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(7), pages 705-731, July.
    • Handle: RePEc:wly:jfutmk:v:45:y:2025:i:7:p:705-731
    DOI: 10.1002/fut.22590
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