Vol. 20, No. 3, 2022
by Zhan Li
There exists a significant and positive cross-sectional relation between moneyness spread and future stock returns. Stocks with high moneyness spread outperform stocks with low moneyness spread, measured by raw and risk-adjusted returns. This predictability can last for at least 15 days, and the predictability of open interest-weighted moneyness spread is more persistent than that of dollar-volume weighted moneyness spread. The long–short portfolio, which buys stocks in the top decile and shorts stocks in the bottom decile, outperforms the market. After accounting for transaction costs, this outperformance continues to hold except the daily-rebalanced portfolio based on dollar volume-weighted moneyness spread.