August 20, 2019
While the standard to calculate model-free option-implied skewness (MFIS) relies on out-of-the-money (OTM) options, we examine the empirical implications of using in-the-money (ITM) options. First, we show that discarding ITM-options based on liquidity arguments appears unreasonable for individual stock options. Second, we show that the information content of ITM-options provides new economic insights. The positive short-term return predictability of OTM-based MFIS significantly reverses if ITM-options are used instead. This return pattern allows to better attribute the return predictability of MFIS to superior information of investors embedded in option prices rather than skewness preferences.