The COVID-19 risk in the cross-section of equity options

We use the implied volatility slope measures derived from US stock options to examine the impact of COVID-19 risk on the options market. The severity of COVID-19 is measured by the number of new confirmed cases. We find that equity options that are most sensitive to COVID-19 generate a more positive IV slope than less COVID-19-sensitive equity options. Moreover, this measure is more positive and significant during the lockdown period. Our findings suggest that the hedging cost of downside tail risk is more expensive during the high-uncertainty period, the time when COVID-19 is more intensive.