Volatility Timing Using ETF Options: Evidence from Hedge Funds

54 Pages Posted: 19 Oct 2022 Last revised: 23 Oct 2022

See all articles by George O. Aragon

George O. Aragon

Arizona State University (ASU) - Finance Department

Shuaiyu Chen

Purdue University - Krannert School of Management

Zhen Shi

Georgia State University

Date Written: October 13, 2022

Abstract

We find that hedge funds’ ETF option positions predict cross-sectional differences in the future volatility of underlying ETFs. The predictive power is strongest for straddle positions and non-equity ETFs. A tracking portfolio of straddles based on funds’ straddle positions earns quarterly abnormal returns of 7.35%. Net of fees, funds using ETF straddles deliver lower risk and higher benchmark-adjusted returns than nonusers. We also find that hedge funds’ trading in ETF options has a positive impact on ETF option prices and improves price efficiency in individual equity options. We conclude that ETF options are an important venue for informed volatility trading.

Keywords: Hedge funds, Exchange-traded funds, Options, Volatility timing

JEL Classification: G11, G12, G23

Suggested Citation

Aragon, George O. and Chen, Shuaiyu and Shi, Zhen, Volatility Timing Using ETF Options: Evidence from Hedge Funds (October 13, 2022). Available at SSRN: https://ssrn.com/abstract=4246146 or http://dx.doi.org/10.2139/ssrn.4246146

George O. Aragon

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Shuaiyu Chen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
5853198838 (Phone)
47906-1744 (Fax)

Zhen Shi (Contact Author)

Georgia State University ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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