Abstract
This paper uses the volatility surface data from options contracts to document a strong, robust, and positive cross-sectional relation between risk-neutral skewness (RNS) and subsequent stock returns. The differential return between high and low RNS stocks amounts to 0.17% per week. Pre-announcement RNS is positively related to earnings announcement returns, and the positive RNS-return relation is more pronounced for other non-scheduled news releases, suggesting that it is informed trading that drives the positive relation between RNS and returns. We also find that RNS contains incremental information beyond trading signals captured by option implied volatility and volume.
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