Option price asymmetry, speculation and stock short-sale cost

Jiantao Ma and Yuanyi Zhang

Journal of Banking & Finance, 2025, vol. 180, issue C

Abstract: We introduce implied variance asymmetry (IVA) — the weighted difference between out-of-the-money call and put option prices — as a predictor of cross-sectional option returns. We find that IVA negatively predicts future delta-hedged call returns and positively predicts future delta-hedged put returns. These predictive relationships reflect distinct investor behaviors: retail investors drive the overpricing of high-IVA call options through speculative demand, whereas informed short-sellers bid up prices of low-IVA puts as substitutes for constrained stock short-selling. Furthermore, stocks and put options characterized by low IVA and high short-sale costs experience significantly lower subsequent excess returns. This pattern suggests that low-IVA put buyers pay a premium and they correctly anticipate future stock price declines. In contrast, high-IVA call options exhibit temporary mispricing driven by uninformed speculation, which rapidly reverses.

Keywords: Implied variance asymmetry; Option returns; Speculation; Short-sale cost informed trading (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:180:y:2025:i:c:s0378426625001591

DOI: 10.1016/j.jbankfin.2025.107539

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