Bid and ask prices of index put options: Which predicts the underlying stock returns?

Jian Chen and Yangshu Liu

Journal of Futures Markets, 2020, vol. 40, issue 9, 1337-1353

Abstract: In this study, we separately estimate the implied volatility from the bid and ask prices of deep out‐of‐the‐money put options on the S&P500 index. We find that the implied volatility of ask prices has stronger predictive power for stock returns than does the implied volatility of bid prices. We identify two sources of the better performance of the ask price implied volatility: one is its stronger predictive power during economic recessions and in the presence of increasing intermediary capital risk, and the other is its richer information about the future market variance risk premium.

Date: 2020
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