We construct a joint score measure using option‐implied volatility, skewness, and kurtosis gauging investors' expectations about favorable future return distribution properties. The high–low decile portfolio formed on this measure earns a statistically significant 0.75% value‐weighted average monthly return. Risk‐adjusted returns are significant and robust when controlling for various characteristics. The positive abnormal return of the spread portfolio can be explained by its exposure to aggregate volatility risk when investors' sentiment is low. When sentiment is high, it is also driven by information flow from the options to the stock market for stocks perceived to be as relatively mispriced.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.