This work was supported by Hankuk University of Foreign Studies Research Fund of 2009. We are grateful to Robert Webb (the editor) and an anonymous referee for many constructive comments and suggestions. We also thank seminar participants at the Korea Derivatives Association Meeting (2008)
THE PERFORMANCE OF TRADERS' RULES IN OPTIONS MARKET
SOL KIM*This study focuses on the usefulness of the traders' rules to predict future implied volatilities for pricing and hedging KOSPI 200 index options. There are two versions of this approach. In the "relative smile" approach, the implied volatility skew is treated as a fixed function of moneyness. In the "absolute smile" approach, the implied volatility skew is treated as a fixed function of the strike price. It is found that the "absolute smile" approach shows better performance than Black, F. and Scholes, L. (1973)