Asymmetric price distribution and bid-ask quotes in the stock options market

We present a model of the bid and ask quotes in the equity option market when option payoffs are asymmetrically distributed due to the limited liability of the option. We then provide empirical evidence for the actively-traded Chicago Board Options Exchange stock options, which is consistent with the implications of our model. First, the bid and ask quotes are asymmetric around the option value, with the value being closer to the bid quote than to the ask. Second, the degree of the asymmetry increases as the moneyness of the option decreases. Finally, the ask quote of an option changes more than its bid quote. An important implication of the paper is that the bid-ask midpoint is not an unbiased estimator of the option value, especially for out-of-the-money options