Positive stock information in out-of-the-money option prices

We examine whether the option market leads stock with respect to positive in addition negative price discovery. document that out-of-the-money (OTM) prices, which determine Risk-Neutral Skewness (RNS) of underlying return’s distribution, can embed information regarding stock. A long-only portfolio stocks highest RNS values yields a significant alpha post-ranking week during period 1996–2014. This outperformance is mainly driven by are relatively underpriced but also exposed greater downside risk. These findings consistent trading mechanism where investors choose exploit perceived underpricing via OTM options due their embedded leverage, rather than directly buying avoid exposure its potential downside. Due absence severe limits-to-arbitrage for long-side, correction signalled very quick, typically overnight.