The Implied Volatility of ETF and Index Options

The International Journal of Business and Finance Research, Vol. 5, No. 4, pp. 35-44, 2011

10 Pages Posted: 7 Jul 2011

See all articles by Stoyu I. Ivanov

Stoyu I. Ivanov

San Jose State University

Jeff Whitworth

University of Houston, Clear Lake

Yi Zhang

Prairie View A&M University

Date Written: 2011

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).

Keywords: exchange-traded funds, index options, implied volatility, open interest

JEL Classification: G11, G12

Suggested Citation

Ivanov, Stoyu I. and Whitworth, Jeff and Zhang, Yi, The Implied Volatility of ETF and Index Options (2011). The International Journal of Business and Finance Research, Vol. 5, No. 4, pp. 35-44, 2011. Available at SSRN: https://ssrn.com/abstract=1879583

Stoyu I. Ivanov (Contact Author)

San Jose State University ( email )

San Jose, CA 95192-0066
United States

Jeff Whitworth

University of Houston, Clear Lake ( email )

2700 Bay Area Blvd.
Houston, TX 77058
United States
281-283-3218 (Phone)

Yi Zhang

Prairie View A&M University ( email )

PO Box 519
MS2310
Prairie View, TX 77446
United States

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