What do Index Options Teach us About Covid-19?

Abstract

Risk-neutral distributions of the S&P 500 inform about the COVID-19 pandemic beyond what one can learn from index values and the market fear gauge VIX alone. We learn that, on February 20, 2020, the index did not reflect the impending crisis yet. Only on March 16, 2020, was the full impact visible, with a pronounced bimodality for longer-maturity options showing a sizeable crash scenario. The corresponding physical distribution is more symmetric and features a high-volatility crash scenario instead. Firms bought crash protection ahead of the index crash, while retail customers bought it as the index was already recovering.