How Spanish options market smiles in summer: an empirical analysis for options on IBEX-35

This paper examines the behaviour of the smile in the Spanish Stock Exchange during 2011 and 2012 summers. In these periods, the value of the main index of the Spanish Stock Exchange market IBEX-35 had fallen down a maximum of 2103.60 points in summer 2011, which made a drop of 20.05% in this period. On the contrary, in summer 2012, it had raised a maximum of 2165.70 points. That means a rise of 26.31%, whereas the Spanish risk premium had raised dramatically. By linear interpolation, implied volatilities for moneyness points needed were calculated. Then, we construct 3288 smile curves and the same quantity of distortion levels. Thousand six hundred and forty-four smiles are for both call and put option contracts, and for all summer 2011 and 2012 maturities (June, July, August and September). Next, we compare all smile curves with 1 of the 17-typical shape patterns for calls, puts, different dates, etc. Afterwards, we take the value of the distortion level calculated before and include the smile in one A–E class of distortion. We can notice that the most popular types are only two, for both calls and puts, Left Smirk (LK) rather than Reversed Right Smirk (RRK); all smiles are formed in the same way, and they are all from ‘D’ class. The changes between LK and RRK occur only on, or one day after, expiring dates, thus are jumps in distortion. Afterwards, we make a comparison with 2013 and 2014 summers' smiles which are not marred by the short-selling ban imposed by the Spanish Securities Exchange Commission in 2011 and 2012.