The Implied Volatility of ETF and Index Options
Stoyu I. Ivanov
San Jose State University
University of Houston, Clear Lake
Prairie View A&M University
The International Journal of Business and Finance Research, Vol. 5, No. 4, pp. 35-44, 2011
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).
Number of Pages in PDF File: 10
Keywords: exchange-traded funds, index options, implied volatility, open interest
JEL Classification: G11, G12Accepted Paper Series
Date posted: July 7, 2011
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