Impact of microstructure biases on at-the-money option return estimates

Investigate whether microstructure biases in high-frequency option prices materially affect daily excess returns of at-the-money straddle portfolios, and determine if these biases are indeed smaller than those affecting options away from the money.

Background

High-frequency option returns can suffer from microstructure biases, especially at short horizons. The authors conjecture that such biases are less severe for at-the-money options than for options away from the money, implying limited distortion of their daily straddle return results. Empirical verification is needed.