ImpliedVolatilityofLeveragedETFOptions-ImpliedVolatility.PDFVIP

Implied Volatility of Leveraged ETF Options Tim Leung IEOR Dept. Columbia University joint work with Ronnie Sircar (Princeton) Cornell Financial Engineering Seminar Feb. 6, 2013 1 / 37 Tim Leung Implied Volatility of Leveraged ETF Options LETFs and Their Options Leveraged Exchange Traded Funds (LETFs) promise a fixed leverage ratio with respect to a given underlying asset or index. Most typical leverage ratios are: (long) 1, 2, 3, and (short) −1, −2, −3. Significant rise in the use of (L)ETFs and their options in the past decade. In 2012, total notional on ETF options is $40-50 bil, as compared to $90 bil for SP 500 index options. ETF options across 4 asset classes: equity, debt, commodity, and currency. 85% of the total ETF options volume is traded among only four ETFs: SPY (SP 500), IWM (Russell 2000), QQQ (Nasdaq 100) and GLD (gold). 2 / 37 Tim Leung Implied Volatility of Leveraged ETF Options Empirical LEFT Prices 0.2 SSO 0.15 SDS 0.1 n r u t 0.05 e R e v 0 i t a l u m −0.05 u C −0.1 −0.15 −0.2