Abstract
This paper studies the information inferred from the Carr and Wu’s (2020) formula based on a new option pricing framework in the United States Oil Fund (USO) options. We first document the term structure and dynamics of the risk-neutral variance and covariance rates which lead to a “U”-shaped implied volatility smile with a positive curvature. We then investigate the return predictability of the innovations in the risk-neutral variance and covariance rates (DRNV and DRNC) and their term structures (TRNV and TRNC) and find that DRNC is a significant and robust predictor to forecast daily, weekly and monthly USO excess returns in both statistical and economic terms based on in-sample and out-of-sample tests.