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/lp/oxford-university-press/call-put-implied-volatility-spreads-and-option-returns-6NY9wyOB1r
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- Publisher
- Oxford University Press
- Copyright
- © The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oup.com
- ISSN
- 2045-9920
- eISSN
- 2045-9939
- DOI
- 10.1093/rapstu/rat006
- Publisher site
- See Article on Publisher Site
Abstract
Prior literature shows that implied volatility spreads between call and put options are positively related to future underlying stock returns. In this paper, however, we demonstrate that the volatility spreads are negatively related to future out-of-the-money call option returns. Using unique data on option volumes, we reconcile the two pieces of evidence by showing that option demand by sophisticated, firm investors drives the positive stock return predictability based on volatility spreads, while demand by less sophisticated, customer investors drives the negative call option return predictability. Overall, our evidence suggests that volatility spreads contain information about both firm fundamentals and option mispricing. (JEL G12, G13, G14, L83)
Journal
The Review of Asset Pricing Studies – Oxford University Press
Published: Dec 9, 2013