Informativeness of truncation in the options market

Truncation—the absence of deep out-of-the-money option price observations—exhibits significant underlying return predictive and forecasting power. Incorporating truncation into S&P500 spot return models improves both in-sample predictive accuracy and out-of-sample forecasting performance. The close relationship between truncation, underlying returns, and option-implied moments offers a potential explanation for its prediction capabilities. Truncation is not merely noise but contains valuable return-predictive information that may systematically influence the performance of implied moment estimates.