Information content of right option tails: Evidence from S&P 500 index options

Greg Orosi ()

Journal of Asset Management, 2017, vol. 18, issue 7, No 2, 516-526

Abstract: Abstract In this study, we investigate how useful the information content of out-of-the-money S&P 500 index call options is to predict the size and direction of the underlying index for the period 2004–2013. First, we demonstrate that behavior of the right tail of the option-implied risk-neutral distribution can be characterized by a single parameter. Subsequently, we find that weekly changes in the tail parameter can be used to devise trading strategies that are likely to outperform the underlying index on a risk-adjusted basis. Moreover, we demonstrate that even during a period when the strategies do not outperform the index, our approach can be used to obtain information about future index returns.

Keywords: trading strategy; option-implied information; performance evaluation (search for similar items in EconPapers)
JEL-codes: C13 G10 G11 G13 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1057/s41260-017-0049-4

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