Option-implied skewness: Insights from ITM-options

Mohrschladt H, Schneider J


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.

Keywords
In-the-money-options; Option-implied skewness; Return predictability; Market frictions



Publication type
Research article (journal)

Peer reviewed
Yes

Publication status
Published

Year
2021

Journal
Journal of Economic Dynamics and Control

Volume
131

Pages range
104227

Language
English

ISSN
0165-1889

DOI