IDEAS home Printed from https://ideas.repec.org/a/ibf/ijbfre/v5y2011i4p35-44.html
   My bibliography  Save this article

The Implied Volatility Of Etf And Index Options

Author

Listed:
  • Stoyu I. Ivanov
  • Jeff Whitworth
  • Yi Zhang

Abstract

We examine the option-implied volatility of the three most liquid ETFs (Diamonds, Spiders, and Cubes) and their respective tracking indices (Dow 30, S&P 500, and NASDAQ 100). We find that volatility smiles for ETF options are more pronounced than for index options, primarily because deep-in-themoney ETF options have considerably higher implied volatility than deep-in-the-money index options. The observed difference in implied volatility is not due to a difference between the realized return distributions of the underlying ETFs and indices. Differences in implied volatility for ETF and index options also do not appear to be explained by discrepancies in net buying pressure, as theorized by Bollen and Whaley (2004).

Suggested Citation

  • Stoyu I. Ivanov & Jeff Whitworth & Yi Zhang, 2011. "The Implied Volatility Of Etf And Index Options," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 5(4), pages 35-44.
    • Handle: RePEc:ibf:ijbfre:v:5:y:2011:i:4:p:35-44
    as

    Download full text from publisher

    File URL: http://www.theibfr2.com/RePEc/ibf/ijbfre/ijbfr-v5n4-2011/IJBFR-V5N4-2011-3.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kang, Jangkoo & Park, Hyoung-Jin, 2008. "The information content of net buying pressure: Evidence from the KOSPI 200 index option market," Journal of Financial Markets, Elsevier, vol. 11(1), pages 36-56, February.
    2. Evnine, Jeremy & Rudd, Andrew, 1985. "Index Options: The Early Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 743-756, July.
    3. Kam C. Chan & Louis T. W. Cheng & Peter P. Lung, 2004. "Net buying pressure, volatility smile, and abnormal profit of Hang Seng Index options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(12), pages 1165-1194, December.
    4. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, April.
    5. James M. Poterba & John B. Shoven, 2002. "Exchange-Traded Funds: A New Investment Option for Taxable Investors," American Economic Review, American Economic Association, vol. 92(2), pages 422-427, May.
    6. Xu, Xinzhong & Taylor, Stephen J., 1994. "The Term Structure of Volatility Implied by Foreign Exchange Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(1), pages 57-74, March.
    7. Pontiff, Jeffrey, 1997. "Excess Volatility and Closed-End Funds," American Economic Review, American Economic Association, vol. 87(1), pages 155-169, March.
    8. Gurdip Bakshi & Nikunj Kapadia & Dilip Madan, 2003. "Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options," The Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 101-143.
    9. Kam C. Chan & Louis T. W. Cheng & Peter P. Lung, 2006. "Testing The Net Buying Pressure Hypothesis During The Asian Financial Crisis: Evidence From Hang Seng Index Options," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(1), pages 43-62, March.
    10. Day, Theodore E. & Lewis, Craig M., 1988. "The behavior of the volatility implicit in the prices of stock index options," Journal of Financial Economics, Elsevier, vol. 22(1), pages 103-122, October.
    11. Pena, Ignacio & Rubio, Gonzalo & Serna, Gregorio, 1999. "Why do we smile? On the determinants of the implied volatility function," Journal of Banking & Finance, Elsevier, vol. 23(8), pages 1151-1179, August.
    12. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rohini Grover & Susan Thomas, 2012. "Liquidity Considerations in Estimating Implied Volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(8), pages 714-741, August.
    2. Chalamandaris, Georgios & Rompolis, Leonidas S., 2012. "Exploring the role of the realized return distribution in the formation of the implied volatility smile," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1028-1044.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    4. Alexander, Carol & Deng, Jun & Feng, Jianfen & Wan, Huning, 2023. "Net buying pressure and the information in bitcoin option trades," Journal of Financial Markets, Elsevier, vol. 63(C).
    5. Sobhesh Kumar Agarwalla & Sumit Saurav & Jayanth R. Varma, 2022. "Lottery and bubble stocks and the cross‐section of option‐implied tail risks," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(2), pages 231-249, February.
    6. Alejandro Bernales & Thanos Verousis & Nikolaos Voukelatos & Mengyu Zhang, 2020. "What do we know about individual equity options?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(1), pages 67-91, January.
    7. Liu, Zhangxin (Frank) & Faff, Robert, 2017. "Hitting SKEW for SIX," Economic Modelling, Elsevier, vol. 64(C), pages 449-464.
    8. Doojin Ryu & Doowon Ryu & Heejin Yang, 2021. "The impact of net buying pressure on index options prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 27-45, January.
    9. Jianhui Li & Sebastian A. Gehricke & Jin E. Zhang, 2019. "How do US options traders “smirk” on China? Evidence from FXI options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1450-1470, November.
    10. Chen, Ren-Raw & Hsieh, Pei-lin & Huang, Jeffrey, 2018. "Crash risk and risk neutral densities," Journal of Empirical Finance, Elsevier, vol. 47(C), pages 162-189.
    11. Jin Zhang & Yi Xiang, 2008. "The implied volatility smirk," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 263-284.
    12. Carol Alexander & Jun Deng & Jianfen Feng & Huning Wan, 2021. "Net Buying Pressure and the Information in Bitcoin Option Trades," Papers 2109.02776, arXiv.org, revised Mar 2022.
    13. Jozef Barunik & Mattia Bevilacqua & Radu Tunaru, 2022. "Asymmetric Network Connectedness of Fears," The Review of Economics and Statistics, MIT Press, vol. 104(6), pages 1304-1316, November.
    14. Elyas Elyasiani & Silvia Muzzioli & Alessio Ruggieri, 2016. "Forecasting and pricing powers of option-implied tree models: Tranquil and volatile market conditions," Department of Economics 0099, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    15. Chen, Jing & Han, Qian & Ryu, Doojin & Tang, Jing, 2022. "Does the world smile together? A network analysis of global index option implied volatilities," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    16. David S. Bates, 1995. "Testing Option Pricing Models," NBER Working Papers 5129, National Bureau of Economic Research, Inc.
    17. Kam C. Chan & Carl R. Chen & Peter P. Lung, 2010. "Business Cycles and Net Buying Pressure in the S&P 500 Futures Options," European Financial Management, European Financial Management Association, vol. 16(4), pages 624-657, September.
    18. Panayiotis Andreou & Chris Charalambous & Spiros Martzoukos, 2014. "Assessing the performance of symmetric and asymmetric implied volatility functions," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 373-397, April.
    19. Byeong-Je An & Andrew Ang & Turan G. Bali & Nusret Cakici, 2014. "The Joint Cross Section of Stocks and Options," Journal of Finance, American Finance Association, vol. 69(5), pages 2279-2337, October.
    20. Szu, Wen-Ming & Wang, Ming-Chun & Yang, Wan-Ru, 2011. "The determinants of exchange settlement practices and the implication of volatility smile: Evidence from the Taiwan Futures Exchange," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 826-838, October.

    More about this item

    Keywords

    exchange-traded funds; index options; implied volatility; open interest;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibf:ijbfre:v:5:y:2011:i:4:p:35-44. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mercedes Jalbert (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.