Option price asymmetry, speculation and stock short-sale cost

We introduce implied variance asymmetry ($IVA$) — the weighted difference between out-of-the-money call and put option prices — as a predictor of cross-sectional option returns. We find that $IVA$ negatively predicts future delta-hedged call returns and positively predicts future delta-hedged put returns. These predictive relationships reflect distinct investor behaviors: retail investors drive the overpricing of high-$IVA$ call options through speculative demand, whereas informed short-sellers bid up prices of low-$IVA$ puts as substitutes for constrained stock short-selling. Furthermore, stocks and put options characterized by low $IVA$ and high short-sale costs experience significantly lower subsequent excess returns. This pattern suggests that low-$IVA$ put buyers pay a premium and they correctly anticipate future stock price declines. In contrast, high-$IVA$ call options exhibit temporary mispricing driven by uninformed speculation, which rapidly reverses.