Implied Volatility of Leveraged ETF Options

Leung, Tim; Sircar, Ronnie

doi:10.1080/1350486x.2014.975825

Cited by 34 publications

(36 citation statements)

References 14 publications

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“…Other related studies are conducted by Simon (2007) and Szado and Schneeweis (2010) who examine profitability of different QQQ option strategies. Other studies examining ETF and option implied volatility behaviour are Marshall et al (2013) and Leung and Sircar (2013), among others. Marshall et al (2013) use high-frequency data to examine arbitrage in the two extremely liquid S&P 500 tracking ETFs, SPY and IVV.…”

Section: Hypotheses Development and Methodologymentioning

confidence: 99%

Analysis of the QQQ spot and option volatility behaviour around the QQQ move from AMEX to NASDAQ

Ivanov

2015

IJFSM

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In this paper, we study the behaviour of QQQ volatility in the spot and option markets around QQQ's move from AMEX to NASDAQ on 1 December 2004. We test whether the QQQ option implied volatility has changed around this event and whether this was a result of a change in spot volatility or hedging demand. We find that indeed the QQQ option implied volatility has changed around the time of the move. We document that neither QQQ spot volatility nor speculation has had an impact on the implied volatility change. We find that investor hedging activity is the driving force behind this change, in support of Bollen and Whaley's net buying pressure hypothesis. To the best of our knowledge, analysis of spot and option markets around moves of trading from one exchange to another and name changes have not been done before.Reference to this paper should be made as follows: Ivanov, S.I. (2015) 'Analysis of the QQQ spot and option volatility behaviour around the QQQ move from AMEX to NASDAQ', Int.

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Section: Hypotheses Development and Methodologymentioning

confidence: 99%

Analysis of the QQQ spot and option volatility behaviour around the QQQ move from AMEX to NASDAQ

Ivanov

2015

IJFSM

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“…For this reason, the full implied volatility expansion—not just the scaling argument—is important. Remark Zhang () and Leung and Sircar () postulate an alternative implied volatility scaling based on stochastic arguments. Given the terminal ETF value

X_{τ} = k

, they compute the expected future log ‐moneyness

Z_{τ} - z

\begin{matrix} true \\ right E_{x, y, z} [Z_{T} - z | X_{T} = k] & = & left β (k - x) - \frac{1}{2} β (β - 1) \\ right \int_{0}^{τ} E_{x, y, z} [σ^{2} false(s, X_{s}, Y_{s} false) | X_{τ} & = & left k false] normald s, \end{matrix}

where

{double-struckE}_{x, y, z} false[\cdot false] = E false[\cdot false| X_{0} = x, Y_{0} = y, Z_{0} = z false]

.…”

Section: Implied Volatilitymentioning

confidence: 99%

“…They also note from the ETF and LETF SDEs that the volatility of Z is

| β |

times the volatility of X . Using the above as heuristic, the authors propose to scale implied volatilities as follows:

\begin{matrix} true \\ right σ_{Z} (τ, λ) & = & left | β | σ_{X} (τ, β λ - \frac{1}{2} β false(β - 1 false) I false(τ false)), \\ right I false(τ false) & = & left \int_{0}^{τ} E_{x, y, z} [σ^{2} false(s, X_{s}, Y_{s} false) | X_{τ} = k] normald s . \end{matrix}

In Zhang () and Leung and Sircar (), the value of

I (τ)

is estimated using an average from observed implied volatility. In contrast, the scaling proposed in does not attempt to account for the integral in .…”

Section: Implied Volatilitymentioning

confidence: 99%

“…Nevertheless, options on LETFs only currently trade with maturities of less than 1.25 years . Leung and Sircar () have plotted the empirical implied volatilities for four S&P500‐based LETF options (

β = \pm 2, \pm 3

), all with maturities of less than a year. Hence, in the numerical examples below, we focus on these maturities.…”

Section: Examplesmentioning

confidence: 99%

“…In a recent paper, Leung and Sircar () apply asymptotic techniques to understand the link between implied volatilities of the ETF and LETFs of different leverage ratios within a multiscale stochastic volatility framework (see Fouque et al. for a review of multiscale methods).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Leveraged Etf Implied Volatilities From Etf Dynamics

Leung

Lorig

Pascucci

2016

Mathematical Finance

Self Cite

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The growth of the exchange-traded fund (ETF) industry has given rise to the trading of options written on ETFs and their leveraged counterparts (LETFs). We study the relationship between the ETF and LETF implied volatility surfaces when the underlying ETF is modeled by a general class of local-stochastic volatility models. A closed-form approximation for prices is derived for European-style options whose payoff depends on the terminal value of the ETF and/or LETF. Rigorous error bounds for this pricing approximation are established. A closed-form approximation for implied volatilities is also derived. We also discuss a scaling procedure for comparing implied volatilities across leverage ratios.The implied volatility expansions and scalings are tested in three well-known settings: CEV, Heston and SABR.

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Understanding the Tracking Errors of Commodity Leveraged ETFs

Guo

Leung

2015

Commodities, Energy and Environmental Finance

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Commodity exchange-traded funds (ETFs) are a significant part of the rapidly growing ETF market. They have become popular in recent years as they provide investors access to a great variety of commodities, ranging from precious metals to building materials, and from oil and gas to agricultural products. In this article, we analyze the tracking performance of commodity leveraged ETFs and discuss the associated trading strategies. It is known that leveraged ETF returns typically deviate from their tracking target over longer holding horizons due to the so-called volatility decay. This motivates us to construct a benchmark process that accounts for the volatility decay, and use it to examine the tracking performance of commodity leveraged ETFs. From empirical data, we find that many commodity leveraged ETFs underperform significantly against the benchmark, and we quantify such a discrepancy via the novel idea of realized effective fee. Finally, we consider a number of trading strategies and examine their performance by backtesting with historical price data.

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Implied Volatility of Leveraged ETF Options

Cited by 34 publications

References 14 publications

Analysis of the QQQ spot and option volatility behaviour around the QQQ move from AMEX to NASDAQ

Analysis of the QQQ spot and option volatility behaviour around the QQQ move from AMEX to NASDAQ

Leveraged Etf Implied Volatilities From Etf Dynamics

Understanding the Tracking Errors of Commodity Leveraged ETFs

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