Skew Premiums around Earnings Announcements

In this study, we examine negative skew premiums in the option equity markets around earnings announcements. Prior literature suggests stock returns are more negatively skewed on earnings dates but theoretical models suggest that anticipated price jumps should not carry a skew premium. We use the realized returns to delta-neutral risk reversals option spread trades as a proxy for the skew premiums. We find skew premiums are economically and statistically significant around earnings announcements, the premium is higher on earnings dates compared to non-earnings dates, and the premium persists conditional on variance risk premiums. We also find skew and variance risk premiums have increased in recent years. Finally, cross-sectional tests suggest that firms with higher implied volatility slopes and implied variances generate large losses to investors protecting themselves with skew trades. However, unlike variance risk premiums, we do not find a firm size effect for skew premiums around earnings announcement dates