Short-Term Market Risks Implied by Weekly Options

We study short-term market risks implied by weekly S&P 500 index options. The introduction of weekly options has dramatically shifted the maturity profile of traded options over the last five years, with a substantial proportion now having expiry within one week. Such short-dated options provide a direct way to study volatility and jump risks. Unlike longer-dated options, they are largely insensitive to the risk of intertemporal shifts in the economic environment. Adopting a novel semi-nonparametric approach, we uncover variation in the negative jump tail risk which is not spanned by market volatility and helps predict future equity returns. Incidents of tail shape shifts coincide with mispricing of standard parametric models for longer-dated options. As such, our approach allows for easy identification of periods of heightened concerns about negative tail events that are not always "signaled" by the level of market volatility and elude standard asset pricing models.