Did option traders anticipate the crash? Evidence from volatility smiles in the U.K. with U.S. comparisons
✍ Scribed by Gemmill, Gordon
- Publisher
- John Wiley and Sons
- Year
- 1996
- Tongue
- English
- Weight
- 833 KB
- Volume
- 16
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
This article is concerned with smiles in London's FTSE 100 index options. Previous studies concentrated upon the average size of the smile, but the objective here is different: it is to examine how the skewness of the smile changes over time and whether that is either a prediction of market movements or reflects past movements. A smile certainly exists, but are changes in its shape informative? The skewness measure of this article compares the volatilities of puts which have striking prices 2% below the forward price with calls which have striking prices 2% above the forward price. Thus, if the forward price is 100, the volatility of a put at 98 is compared with the volatility of a call at 102. 'The London Stock Exchange is a dealer market. The FTSE 100 Index is based upon the midpoint of the quotes for the constituent shares, so it is never "stale." 'In the preliminary study [Gemmill (199i)l it was found that results were unaffected by whether options with one, two or three months' maturity were used. 5The Crash occurred on October 19, 1987. The London market was open on that Monday, but had been closed on Friday, October 16th, due to power cuts following a hurricane. There are therefore no data for October 16th.