Volatility Leadership Among Index Options

Equity options are not only an attractive trading vehicle due to the high leverage they offer, they also enable investors to trade their volatility expectations. With high-resolution option data, we analyze the volatility information embedded in index options with different moneyness and maturity. This study sets out to characterize the volatility process of co-integrated assets by exploiting implied volatilities in a cross-sectional options analysis. For the S&P 500 index market, we find that on both the price as well as the volatility level, the ETF market seems to be most efficient with regard to transmitting price and volatility information. Looking at the options separately, our study suggests that slightly out-of-the-money put options contain more volatility information than either at-the-money put or call options