Skew Premiums Around Earnings Announcements

Abstract

We examine skew premiums in equity options around earnings announcements. We use the realized returns to delta-neutral risk reversal option spreads as a proxy for the skew premiums. We find skew premiums are economically significant around earnings announcements and are not explained by changes in variance risk premiums. For firms with negative option-implied skewness, negative skew premiums triple on earnings announcements. For firms with positive option-implied skewness, positive skew premiums increase about 23%. The premiums embedded in option prices are associated with order imbalances in puts to calls and are related to both systematic and idiosyncratic risks.