Skew Premiums Around Earnings Announcements

ABSTRACT We examine skew premiums in equity options around earnings announcements. We use the realized returns to delta‐neutral risk reversal option spreads as a proxy for the skew premiums. We find skew premiums are economically significant around earnings announcements and are not explained by changes in variance risk premiums. For firms with negative option‐implied skewness, negative skew premiums triple on earnings announcements. For firms with positive option‐implied skewness, positive skew premiums increase about 23%. The premiums embedded in option prices are associated with order imbalances in puts to calls and are related to both systematic and idiosyncratic risks.