Abstract
While the standard to calculate model-free option-implied skewness (MFIS) relies on out-of-the-money (OTM) options, we examine the empirical implications of using in-the-money (ITM) options. First, we show that discarding ITM-options based on liquidity arguments appears unreasonable for individual stock options. Second, we show that the information content of ITM-options provides new economic insights. The positive short-term return predictability of OTM-based MFIS significantly reverses if ITM-options are used instead. This return pattern allows to better attribute the return predictability of MFIS to superior information of investors embedded in option prices rather than skewness preferences. Based on these findings, we introduce a new measure of sophisticated option trading called Delta-MFIS.
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