21 2018 12:30 - 13:45
Sala riunioni 2.e4.sr03 - Via Roentgen, 1
Option Implied Spreads
Pietro Veronesi, Chicago Booth
Abstract
We introduce the option-implied spread (IS), a metric alternative to implied volatility (IV) to gauge the relative value of European options. IS is the credit spread implicit in a European option’s implied bond, i.e. a portfolio long a safe bond and short a put option. Unlike IV, IS is model-free, it is straightforward to compute, it is consistent across strike prices and maturities, and it has the natural interpretation of a yield – in excess of risk free rate – that is implicit in an specific option investment. Empirically, IS and its version normalized by default probability (NIS), are strongly time varying, increase in recessions and with uncertainty, and help predict future implied-bond returns.