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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

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    References listed on IDEAS

    as
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    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

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