Document Type
Article
Publication Date
January 2011
Keywords
exchange-traded funds, index options, implied volatility, open interest
Disciplines
Finance and Financial Management
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-the money 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).
Recommended Citation
Stoyu Ivanov, Jeff Whitworth, and Yi Zhang. "The Implied Volatility of ETF and Index Options." Faculty Publications (2011).
Comments
Copyright © 2005-2014 The IBFR. All Rights Reserved. This article originally appeared in International Journal of Business and Finance Research in Volume 5, Issue 4 and can be found online at this link.