Implied dividend bounds in option prices: anatomy of two markets

Abstract We propose a measure of uncertainty of a dividend paying asset based on the cross-section of bid-ask spreads of options. This is the difference between the cheapest synthetic long position of the asset that it is possible to construct using European options and the most expensive short position that can be constructed at the same time for the same maturity. For index and stock option applications this measure can be compared with other direct measures of uncertainty such as the bid-ask spread of the futures market on the underlying or their dividend. It turns out that for index options the measure is tighter than the bid-ask spread of the futures market for maturities longer than the first two futures contracts. The comparison of the measure for individual stock options with dividend futures gives mixed results. Finally, applying a two-tail distortion (2TD) model we find an asymmetric setting of option ask and bid prices with respect to the reference model. Most of the distortion is loaded on the ask call price and bid put prices. This corresponds to asymmetric uncertainty in dividend yield expectations, which put more weight on low dividends.