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P. 1

Option Hapiness and Liquidity|Views: 4|Likes: 0

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https://www.scribd.com/doc/216036691/Option-Hapiness-and-Liquidity

06/17/2015

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- 1. Introduction
- 2. Theoretical background
- 3. Empirical implementation
- 4. Empirical results
- 5. Concluding remarks
- Bibliography

**Lars Nordén1 and Caihong Xu
**

Finance Department, Stockholm University School of Business, S-106 91 Stockholm, Sweden

Abstract

This study investigates the dynamic relationship between option happiness (the steepness of the volatility smirk) and relative index option liquidity. We find that, on a daily basis, option happiness is significantly dependent on the relative liquidity between option series with different moneyness. In particular, the larger the difference in liquidity between an out-of-the-money option and a concurrent at-the-money call option, the larger the option happiness. This relationship is robust to various relative option liquidity measures based on bid-ask spreads, trading volumes and option price impacts. The results also show a significant maturity effect in option happiness, consistent with the notion that options are “dying smiling”.

Key words: Implied volatility; Volatility smirk; Option happiness; Relative option liquidity

1

Lars Nordén is Professor of Finance at Stockholm University School of Business, Sweden. Caihong Xu is a Ph. D. Candidate at Stockholm University School of Business, Sweden. Please send correspondence to Lars Nordén, Stockholm University School of Business, S-106 91 Stockholm, Sweden. Phone: + 46 8 6747139; Fax: + 46 8 6747440; E-mail: ln@fek.su.se. Both authors are grateful to the Jan Wallander and Tom Hedelius foundation and the Tore Browaldh foundation for research support.

Electronic copy available at: http://ssrn.com/abstract=1472002

1. Introduction

One of the most absorbing and well-documented puzzles in the options literature is the volatility smile or smirk, which relates to the commonly observed excess implied volatility (hereafter IV) of out-of-the-money (OTM) options relative to at-the-money (ATM) options based on the BlackScholes (1973) (BS) model. 2 In the last three decades, a large number of studies have been dedicated to explaining the smirk by relaxing some of the restrictive BS assumptions. Substantial progress has been made, and examples include: 1) the implied binominal tree models of Dupire (1994) and Rubinstein (1994); 2) the stochastic volatility and stochastic interest rate models of Amin and Ng (1993), Bakshi and Chen (1997); and 3) the stochastic volatility jump-diffusion models of Bates (2000), and Scott (1997).3 However, empirical studies by Bakshi et al. (1997), Bates (2000), and Dumas et al. (1998) indicate that even the most flexible option pricing models fail to fully capture the dynamics of the volatility smirk. Specifically, Dumas et al. (1998) show that implied binominal tree models are able to generate the cross-sectional volatility smirk at any point in time, but they fail to capture the dynamics of the volatility smirk since the parameters vary a lot over time. Bakshi et al. (1997) and Bates (2000) find that the stochastic-volatility jumpdiffusion models may generate a smirk more consistent with the market option prices than the standard BS model only with parameter values that are highly implausible and differ a lot from the ones estimated directly from data.

The recent global financial turmoil draws much more attention from academics and practitioners alike to derivative market liquidity than ever before. However, our understanding of liquidity risks in options market is still preliminary. While a growing body of research confirms the role of

The pattern of implied volatility across moneyness differs across different options markets over the world. Sometimes a smile is observed whereas sometimes it is a smirk. For instance, the US stock options usually exhibit a smile while the US stock index options are smirking. In all the following, we term this anomaly the volatility smirk. 2

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Electronic copy available at: http://ssrn.com/abstract=1472002

liquidity in determining asset prices in equity markets,4 fewer studies examine whether liquidity impacts option prices, and hence IVs and the volatility smirk. Some progress has been made in this area, where researchers attempt to explain the smirk by examining the impacts of different aspects of options markets’ microstructure on option prices and IVs. Peña et al. (1999) take a first step to directly examine the determinants of the implied volatility function and find that the general liquidity level of the option market, approximated by the average relative bid-ask spread of traded options, help explain the curvature of the volatility smirk in the Spanish index options market. In addition, Deuskar et al. (2008) investigate the economic determinants of the volatility smirk for interest rate options. In their study, they use the relative bid-ask spreads of ATM options to approximate the general market level of liquidity, but find rather weak evidence for liquidity explaining the shape of the smirk. Dennis and Mayhew (2002) also study the determinants of the slope of volatility smirk for stock options. They try to explain the daily slope of the IV function using firm-specific variables, e.g. firm leverage and option trading volume. However, they fail to find a robust relationship between the slope and the average daily put-tocall volume ratio of all traded options.

Bollen and Whaley (2004) argue that the volatility smirk might be affected by demand and supply considerations among option market participants. They find that net-buying pressure on an option group-by-group basis, constructed as the number of buyer-motivated contracts traded each day minus the number of seller-motivated contracts, accounts for part of the daily, end-of-day, changes in the IV of the corresponding S&P 500 option group. Similarly, Gârleanu et al. (2007) theoretically model demand-pressure effects on option prices and empirically construct a net demand variable, using the difference between the long open interest and the short open interest

We only provide some examples of the more flexible option pricing models. Bates (2003) and Bollen and Whaley (2004) provide excellent and detailed reviews of the recent progressions in option price modeling. 4 See e.g. Amihud and Mendelson (1986), Amihud (2002), Pástor and Stambaugh (2003), Acharya and Pedersen (2005), and Korajczyk and Sadka (2008). 3

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for an option category. Their empirical time series test shows that the imbalance in net demand between two different index option categories helps explain the smirk patterns of index options.

This study investigates the relationship between the dynamics of the volatility smirk and relative option liquidity. In order to capture the dynamics of the volatility smirk, we introduce option happiness as a proxy for the steepness of the smirk, measured as the percentage difference between the IV of an OTM option and the concurrent IV of an ATM call option. Thus, with the OTM call volatility as a reference point, we investigate the steepness of the volatility smirk on both sides using an OTM put and an OTM call respectively. Moreover, recognizing the multidimensionality of liquidity, we consider several measures of liquidity, based on relative bidask spreads, trading volumes, and option price movements respectively. Accordingly, we hypothesize that the relative option liquidity between option series with different moneyness is a driving force behind option happiness over time.

Our study contributes to previous research in several aspects. First, for the first time, we document the properties of the implied volatility smirk for the Swedish index options market.5 Second, we introduce the concept of option happiness, which allows us to investigate the dynamic properties of a large part of the volatility smirk. In addition, we develop comprehensive measures of option liquidity, focusing on the relative liquidity between option series with different moneyness. Third, we improve upon previous studies by Bollen and Whaley (2004) and Gârleanu et al. (2007) by empirically investigating the dynamic relationship between option happiness and relative option liquidity using a variety of liquidity measures, which can further verify whether and how the volatility smirk dynamics is affected by relative option liquidity. To characterize the put (call) option happiness and relative option liquidity, we follow a single OTM index put (call) option contract and a corresponding single ATM index call option contract, with same time left to

4

maturity as the OTM put (call), on a daily basis. Unlike the methodology used in previous studies, e.g. in Bollen and Whaley (2004) and Gârleanu et al. (2007), our method of investigating the dynamic relationship between option happiness and relative option liquidity is not contaminated by potential biases from averaging IVs and relative liquidity in a group of options with different moneyness and different time-to-maturity. In addition, we deliberately choose the Swedish options market to investigate the relative liquidity impacts on option happiness, since the Swedish index options market exhibits a lower degree of liquidity than e.g. US index option markets, in the sense of lower trading activity and wider bid-ask spreads.6

We find a significant smirk pattern as well as a time-to-maturity effect in the Swedish index options market. We also find large liquidity differences between option series with different moneyness. These effects are persistent over the entire sample period. More importantly, the empirical results show that the daily option happiness is significantly dependent on the daily relative liquidity between option series with different moneyness. More specifically, the larger the liquidity difference between the OTM option and the ATM call option, the larger option happiness. This relationship is robust to various relative option liquidity measures based on bidask spreads, trading volumes and option price impacts. In addition, we find that higher put option happiness (a steeper “left-side” volatility smirk) is accompanied with less time left to maturity for the OTM put and the ATM call. Thus, the Swedish index put options are showing a tendency for “dying smiling”, consistent with previous studies. Finally, the analysis indicates that, to some extent, today’s relative option liquidity contains information about tomorrow’s option happiness.

Engström (2002) documents a rather U-shaped smile pattern for Swedish equity options. Similarly, Peña et al. (1999) motivate the use of data from the Spanish IBEX-35 index options on futures market, in their study of liquidity effects on options pricing, with the relevancy of exploring alternative options market which exhibit lower liquidity than e.g. the S&P 500 index options in the US.

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5

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they ought to be equally applicable in an analysis of option market liquidity. Thus. and explores various option liquidity measures. and analyzes the empirical results. whereas resiliency reflects how quickly security prices and quotes restore to equilibrium levels after a change caused by large order flow imbalances or information-less trading activity. and other transaction costs. 2. without inferring a quote change. Theoretical background Liquidity has long been acknowledged as a crucial determinant of market behavior. which prevails for a given amount of the traded security. immediacy and resiliency. and the role of liquidity in explaining the dynamics of the volatility smirk. section 5 ends the paper with some concluding remarks. including the properties of the volatility smirk and liquidity measures over the sample period. Immediacy is a description for how quickly a trade of a given size and cost can be executed. Stoll (1978).The remainder of this paper is organized as follows. 2. The width of a market refers to the bid-ask spread. Section 3 describes the empirical methodology and the data. and on extreme events which incur order imbalances and hence cause 6 . Section 4 presents some summary statistics. measures of liquidity. Harris (1990) discusses four aspects of market liquidity: width. Although the four aspects of market liquidity are illustrated for the equity market. This section discusses the theoretical arguments for liquidity effect in options. Finally. Section 2 discusses the theoretical background for the concept of our analysis of option happiness and the volatility smirk. depth.1 The inventory model The inventory model of Demsetz (1968). liquidity clearly is multidimensional. and Ho and Stoll (1983) among others suggests that liquidity depends on factors that influence the risk of holding inventory for risk averse market makers. The depth is the security volume possible to trade at the observed bid-ask quotes.

inventory overload. margin requirements and discontinuous price movements in the underlying (see Figlewski. Market makers have to charge higher option prices and higher compensation for bearing liquidity risk which would result in a higher excess IV for the OTM index put option over the ATM call option. with a more balanced order flow. caused by e. With larger imbalanced positions in the OTM index put option. Clearly. Furthermore. relative option liquidity may help explain the dynamics of the volatility smirk (option happiness). Based on the inventory model and the reality of constrained hedging. Since options market must clear. 1987) suggests that risk neutral market makers are faced with adverse selections. market makers’ exposures to liquidity risk and volatility risk persist as well. since perfect hedging hardly is attained. market makers’ hedging costs or exposure to liquidity risk would also be higher. constraints to perfect hedging exist in the real option markets. 1989. which exhibits higher liquidity. (2007). transaction costs. and noarbitrage arguments determine the option prices without any liquidity effect. Easley et al. institutional investors tend to have large net long positions in OTM index put options as portfolio insurance. Nevertheless. In this case. In a frictionless economy. if the large order imbalances persist. and Liu and Longstaff. market makers are showing reluctance to provide liquidity by posting a wider bid-ask spread. 1985. 2004). market makers as providers of liquidity have to step in and short a large amount of OTM index put options. As is documented by Bollen and Whaley (2004) and Gârleanu et al. if perfect hedging is attainable. 2.2 The asymmetric information model The asymmetric information model (Kyle. 7 . Shleifer and Vishny. and the liquidity for the OTM index put option would deteriorate accordingly. market makers require no compensation for their information disadvantages. and Easley and O’Hara.g. Glosten and Milgrom. 1985. 1997. market makers are able to perfectly hedge their imbalanced positions at no cost by dynamic replication. The option market is often regarded as a venue for informed trading. the impossibility of continuous trading.

they would require more compensation for their informational disadvantage. the option IV will increase. the potential relationship between option volume and option prices or IVs is not obvious. the trading volume of options may affect market makers’ valuation of the corresponding options and hence the IVs. e. informed investors trade on volatility information in the option market. and the information is subsequently reflected in the underlying stock prices. The effect of option trading volume on IV depends on how market makers interpret the option trading activity.7 Recently. However. On the other hand. Since informed traders are more likely to have firm-specific information sources for stock options than for index options. if market makers think that the liquidity traders are the major players in this specific option. 2.(1998) show that option trading volume can be used as a predictor for future stock price movements. If market makers believe that the high trading volume in an option series is driven by informed traders. (2008) find that stock option volume contains information about future volatility. Accordingly. since the liquidity for this option series deteriorates due to high trading activity by informed traders. when there is more buyer-initiated call (put) volume the 8 7 . that is. stock option volume contains information about future stock price movements. Thus. Pan and Poteshman (2006) demonstrate that even during “normal” times. If prices change after trades.3 Other related literature In liquid markets. Ni et al. market participants should be able to trade at least within some frequency without incurring an excessive price change. we do not expect a significant asymmetric information effect in index options. Hence.g. these price movements Pan and Poteshman (2006) provide the first evidence in support of the expected directional relationship between option volume and future stock price movements. by posting a wider bid-ask spread. They also suggest that asymmetric information is a constraint for dynamic replication of options. and who are causing the high trading volume. they would lower their risk compensation for providing liquidity.

and Martin. which is defined as the ratio of average dollar volume of trading to the average price change during some interval. Simulations conducted by Figlewski (1989) illustrate the difficulty of implementing dynamic arbitrage strategies in an imperfect market and suggest that option prices are not determined solely by arbitrage but fluctuate within reasonably wide bands. At the options market. such as the quoted or effective bid-ask spread.g. Finer measures of illiquidity.8 It can be interpreted as the daily price response associated with one dollar of trading volume. Grossman and Miller (1988) model stock liquidity as the price of immediacy and propose a time series dimension of liquidity. Therefore. The width of the arbitrage bounds on equilibrium option prices are determined by the cost of implementing replicating strategies. averaged over some period. trading volume and open interest. 9 . with the inter-temporal stock price movement being the fundamental measure of stock market liquidity. The importance of liquidity costs in option valuation has long been recognized. thus serving as a measure of price impact. Dubofsky and Groth. (1999) confirm that the general level of liquidity in the option market helps explain the curvature of the smirk. this measure can be obtained from data on daily stock returns and volume that is readily available. Longstaff (1995) also shows that the BS model has strong biases with respect to bid-ask spreads. the option price movement after accounting for the underlying price movement serves as a more reasonable measure of option liquidity. Moreover. which amounts to the daily ratio of the absolute stock return to its dollar volume. However. bid-ask spreads. 8 This measure is essentially similar to another widely used empirical measure in inter-market comparisons of the market liquidity in earlier studies (see Cooper et al.. (2006) develop a pricing price of underlying stocks subsequently will increase (decrease). Çetin et al. 1984. Peña et al. option price movements may act as a measure of the liquidity of the specific option contract if perfect hedging cannot be achieved. As noted in Amihud (2002). 1985. referred to as the liquidity ratio. an option price movement could be purely driven by the corresponding price movement in the underlying security. Amihud (2002) proposes a measure of stock illiquidity. 1975).may constitute a more accurate proxy of the cost of illiquidity than e.

Peña et al. Empirical implementation 3. They model liquidity risk as a stochastic supply curve. (2009) empirically find a clear link between liquidity risks and stock option prices. and find the slope of the volatility smirk becomes steeper when the option market liquidity improves. 3. 9 Similarly. After a series of acquisitions (e. and empirically show that the net demand imbalances between two different option categories help explain the smirk pattern of index options. with the transaction price being a function of the trade size. Gârleanu et al. NASDAQ acquired OMX. (1999) find the volatility smile becomes more pronounced when the option market liquidity deteriorates. the Helsinki Stock Exchange (HEX) merged with OM. (2007) construct a demand-based option pricing model.). On the contrary. 9 Bollen and Whaley (2004) are the first to note that the net buying pressure for different option groups explains corresponding IV level changes. the Iceland Stock Exchange. 10 . fixed income securities. etc. in which they model demand-pressure effects on option prices. options and other derivatives in the Nordic countries. and the joint company name was changed to OMX in 2004. the Copenhagen Stock Exchange.10 The OMXS30 is a value-weighted market index which consists of the 30 most actively traded stocks on the Stockholm Stock Exchange (acquired by OM in 1998).framework for options in an extended BS economy in which the underlying asset is not perfectly liquid.1 The Swedish index options market The Swedish exchange for options and other derivatives (OM) introduced the OMXS30 index in September 1986 as an underlying asset for trading in standardized European options and futures. OMX became the leading exchange for trading stocks. transaction-by-transaction market impact or the probability of information-based trading require data on transactions and quotes which is often unavailable in stock markets outside the US. (1999).g. In 2003. In 2007. In addition they examine whether the aggregate liquidity level of the option market helps explain the volatility smirk as in Peña et al. Empirical evidence in their study reveals that liquidity costs are a significant component of the (stock) option’s price and increase quadratically in the net position of options being hedged. Chou et al. futures.

The OMXS30 index derivatives market consists of European calls. respectively. the contract series expires on the preceding bank day. with up to one. trading is possible in at least three option contract series. can trade directly through NASDAQ-OMX. Incoming orders are automatically matched against orders already in the limit order book if matching orders can be found. either ordinary dealers or market makers. puts. On the fourth Friday of the expiration month. and futures with different maturities. otherwise incoming orders are added to the limit order book. two. A new expiration month option series is listed four Swedish bank days prior to the expiration of the previous options series. one contract series expires. Throughout a calendar year. The trading environment for OMXS30 index derivatives constitutes a combination of an electronic limit order book and a market making system. At that time. the July contracts (with one month left to expiration) and the August contracts (with two months left to expiration) are also listed. the NASDAQ-OMX options and futures exchange is the third largest derivatives exchange in Europe. and three months left to expiration. or if the day in question is not a Swedish bank day or is declared to be a half trading day. towards the end of June.000 contracts per day. For example. All derivatives are traded within the limit order book. 10 Nordén (2006) provides a detailed description of the Swedish index options market. if it is a Swedish bank day. These long contracts always expire in January and are included in the basic maturity cycle when they have less than three months left to expiration. In addition to this basic maturity cycle.and the newly merged company was renamed the NASDAQ-OMX Group upon completion of the deal in early 2008. All OMXS30 index derivatives are cash settled at maturity. Only members of the exchange. Now. the June contracts expire and are replaced with newly issued September contracts. 11 . with a trading activity up to nearly 600. options and futures with maturity up to two years exist. Market makers supply liquidity to the market by posting bidask spreads on a continuous basis.

12 11 . the OMXS30 index ranges between a minimum 635.000 are set at 10 index-point intervals.11 When new option series are introduced strikes are centered round the value of the current OMXS30 index. For instance. Computation of implied volatility Daily option IV ( σ t ) for each option series is computed using the Black (1976) model.000 are set at 20 index-point intervals.74. During our sample period.2 Methodology This section describes the definitions of the main variables and the empirical methodology implemented in our study to investigate the role played by relative option liquidity in explaining the daily variation of the steepness of the volatility smirk – option happiness. strikes are always set at 10 point intervals in our sample. new strikes are introduced as the OMXS30 index value increases or decreases. whereas the underlying index is not. using index futures as underlying asset to calculate the implied volatility has advantages: (1) the index futures contract is tradable. Thus. (2) index futures prices and quotes include future dividends. (3) nonsynchronous prices is not a serious problem in that the options and futures markets close at the same time. 3. OMX uses option valuation formulas according to Black (1976) for assessing margin requirements for the OMXS30 index options. the prevailing range of strikes depends on the evolution of the index during the time to expiration. 12 Options on the index and options on the nearby futures are virtually indistinguishable.For each option series. a range of strikes is available on each trading day. Moreover.47 and a maximum 966. with the corresponding OMXS30 index futures contract as the underlying asset according to:12 (1) Ct = e − rt (T −t ) Ft N (d1 ) − KN (d1 − σ t T − t ) [ ] ] Pt = e − rt (T −t ) KN (−d1 + σ t T − t ) − Ft N (−d1 ) [ The option contract size is the index value times SEK 100. whereas strikes above 1. Strikes below the level 1. Thus. However.

Option happiness on a day t ( OH t ). Option Happiness One way to describe the daily shape of the volatility smirk is to impose structural implied volatility functions (IVFs) to get a daily estimate of the slope or the curvature of the smirk as in Peña et al. to capture the dynamics of the volatility smirk without imposing a structural IVF. Peña et al. (2008) use the absolute difference between IV for an OTM put and IV for an ATM call as a measure of the slope of the volatility smirk. according to:14 (2) OH i. have on average 5-6 options available with different strikes during each day. 13 13 . option happiness is introduced as a measure of the steepness of the volatility smirk. (1999) and Deuskar et al. Ft is the corresponding futures midpoint quote. with 2-4 parameters to estimate. Zhang et al. this approximation would suffer from model specification errors and an error-in-variables bias. K is the strike price of the option contract.d1 = ln (Ft / K ) + 0. Pt denotes either a call or a put option midpoint quote on day t. especially when only a few crosssectional options across moneyness are traded every day. t − σ ATMC . T − t is the time to expiration. is measured as the percentage difference between the IV of an OTM put (call) option and the concurrent IV of an ATM call option. 14 A similar measure for the slope of the S&P500 index options is used in Bollen and Whaley (2004). However.5σ t2 (T − t ) σ t (T − t ) where Ct . (2008). However. t = σ i.13 Consequently. rt is the day t risk free rate of interest with maturity.t σ ATMC . t For instance. their measure is obtained as a group average over option contracts with different moneyness and maturity. (1999).

they use the ratio of the average daily put to call trading On some rare occasions. 15 This method of constructing the option happiness and relative option liquidity measures is not contaminated by the potential biases from averaging the IV and relative liquidity measures within a group of options with different moneyness and maturity. t is the IV of the ATM call option. (2008) only examine the role of the general level of option market liquidity. e. leverage. the OTM put (call) with the strike closest to being 20 index points lower (higher) than the concurrent futures price is either not traded or exhibits unreasonable reported bid or ask quotes. Instead. thus replicating an actual realistic option trading strategy. and the ATM index call with the strike closest to Ft . Relative option liquidity measures Previous studies by Peña et al. To characterize option happiness and relative option liquidity between different option series more accurately. on a day t.where i = OTMC for an OTM call and OTMP for an OTM put. approximated by the daily average relative bid-ask spread for all traded options. and the relative bid-ask spread for an ATM call respectively. the subsequent empirical analysis of the dynamics of option happiness and liquidity will follow the same individual option contracts from day t to the following day t + 1. we use the corresponding put (call) with a strike at 10 index point lower (higher) than the concurrent futures price 14 15 .g. we choose the OTM index put (call) with the strike closest to being 20 index points lower (higher) than the concurrent futures price Ft . in explaining the shape of the volatility smirk. and σ ATMC . and try to explain the daily slope using systematic factors such as market volatility and other firm-specific variables. firm size and stock option trading volume. and the same maturity as the OTM put (call). To examine whether trading activity from the public order flow affects the slope. In those cases. Dennis and Mayhew (2002) use the implied risk-neutral skewness from stock option prices to capture the slope of the IVF. (1999) and Deuskar et al.

0. they find that IV changes are related to net buying pressure. Cao and Wei (2008) examine the aggregate liquidity in the US stock options market and suggest several option market liquidity measures based on the bid-ask spreads. 15 . Gârleanu et al.99.95).volume of all traded options as a proxy for trading pressure. 16 The excess implied volatility of ATM options is the difference between the BS IV and the corresponding benchmark IV based on Bates (2006) model. trading volumes and price movements. 1. They show that the weighted-average net demand variable helps explain the excess IV for ATM options. The first liquidity instead. For index options. the implied volatility skew is defined as the average IV of options with moneyness (0. but find an insignificant relationship between them. which is a weighted-average net demand variable with four different weighting criteria.93. we hypothesize that it is the relative option liquidity across moneyness on a series-by-series basis in the option market that affects option happiness – the steepness of the smirk. minus the concurrent average IV of options with moneyness (0. Accordingly. based on option trading volume. By conducting several separate regression analyses for each moneyness category. we consider three relative option liquidity measures.01). which constitutes an aggregate measure of steepness on an option group-by-group basis. to explain the changes in the IV level for different option moneyness groups. this manner of dealing with missing or erroneous data on a certain day is conservative in the sense that it will not incur us to exaggerate that day’s option happiness. Thus. One possible reason is that this average put to call volume ratio fails to capture the differential liquidity characteristic of different across-moneyness option series. Note here.16 Moreover. Bollen and Whaley (2004) are the first to construct a net buying pressure variable on an option group-bygroup basis. they also construct a measure of the net demand pressure. 17 The excess implied volatility skew refers to the implied volatility skew over the skew predicted by the stochastic volatility with jumps of the underlying index. rather the contrary. (2007) define net demand pressure as the difference between the long open interest and the short open interest for options in specific moneyness categories. 17 Unlike previous studies. the skewness in the jump risk weighted-average net demand between two option groups partly accounts for the excess IV skew.

we expect an increase in LM1 to induce an increase in option happiness. t ) ln(VolOTMC . is the difference between the relative bid-ask spreads of the OTM put (call) option and that of the ATM call option: (3) P LM1 . and BOTMP. t AATMC .t = ln(VolOTMP . t ) − ln(Vol ATMC . t ) / 2 ( AATMC . t ) / 2 ( AATMC . t ) − ln(Vol ATMC . t ) / 2 where AOTMP.t = AOTMC . according to both the inventory model and the asymmetric information model.t = ln(VolOTMC . denoted as LM1 . constitutes the scaled OTM put (call) to ATM call trading volume ratio in logarithms: (4) P LM 2 . t + BATMC . since the bid-ask spread is the compensation for market makers bearing liquidity risk and higher hedging costs. t is the ask quote on day t for the OTM put. t + BOTMP .t ). t − ( AOTMP . AOTMC .t ( LM1. the OTM call. Intuitively. t + Vol ATMC . t and B ATMC .P C measure. t − BATMC .t ). t and AATMC . and the ATM call respectively. t + BATMC . t − BOTMP . t is the corresponding bid quote. t ) C LM 2 .t = AOTMP . t − BOTMC . t AATMC . t − ( AOTMC . t ) ln(VolOTMP . BOTMC. t + Vol ATMC .t ( LM 2. t + BOTMC . t . Thus. referred to as LM 2 . P C Our second liquidity measure. a higher value of LM1 indicates a lower liquidity of the OTM option relative the ATM call. t − BATMC . t ) 16 . t . t ) / 2 C LM1 .

denoted as LM 3 . t is the trading volume on day t (number of traded contracts) for the OTM put. t and Vol ATMC . and the liquidity ratio measure in earlier 17 . then a larger trading volume is interpreted as an improvement in liquidity of the option contract in question. an increase in LM 2 is in this case an indication of a higher liquidity of the OTM put or OTM call relative to the ATM call. the probability of ending up with a large net position is lower. With more active trading in the option contract. Therefore. VolOTMC . which they use as a proxy for trading pressure. Second. and an increase in option happiness is expected. t .t ). Hence. then a larger trading volume is interpreted as a lower liquidity of the option contract. the OTM call. higher trading volume may imply either higher liquidity or lower liquidity of each option contract. We argue that the first case is the most reasonable situation for an index option market. Thus. However. the illiquidity measure from Amihud (2002).and sell-order matching throughout the trading day.or seller-initiated. if informed traders are thought to be the main source behind the trading activity. since the bulk of trading is unlikely to be generated by informed traders.where VolOTMP. First. and contains no information of whether the trades are buyer. originates from Grossman and Miller (1988). P C The third liquidity measure. The liquidity measure LM 2 can be seen as a more well-defined version of the trading volume ratio in Dennis and Mayhew (2002).t ( LM 3. an increase in LM 2 would be an indication of a lower liquidity of the OTM put or OTM call relative to the ATM call. we argue that LM 2 should be used rather as a measure of relative liquidity than a net buying pressure proxy. and a decrease in option happiness is expected. Bollen and Whaley (2004) claim that trading volume might not be an accurate proxy for net buying pressure. if normal liquidity traders are considered as the main driving force behind the trading activity. Daily trading volume is simply the result of buy. and the market makers are less exposed to liquidity risk. and the ATM call respectively.

t − COTMC .t − C ATMC . Each option delta is calculated using the Black (1976) model outlined in equation (1). 1984. t −1DVolOTMP .t . we amend it into a measure of the difference between the daily absolute option price movements. t −1 .000 SEK) of the OTM put. t − ∆ OTMP. OTM call.t = C ATMC . our measure can also be interpreted as the difference between the absolute delta-hedging errors per 1.t −1DVol ATMC . t −1dFt P LM 3 = . t −1DVolOTMC . 1985. t dC ATMC . and DVolOTMP . With reference to the stock market. Amihud (2002) uses the daily ratio of absolute stock return to its dollar volume (averaged over some period) to measure illiquidity at the stock market.. dC ATMC .t −1 is the ATM call price change from day t − 1 to day t.t .t = COTMC .t dC ATMC . netting the concurrent underlying futures price movement. and ATM call on day t − 1 respectively. t dCOTMC . and the ATM call respectively on day t.000 SEK of trading volume. Grossman and Miller (1988) suggest that inter-temporal price movements might provide a more accurate reflection of the “cost” of stock illiquidity. ∆OTMC . t −1dFt C LM 3 . In order to fit as a relative option liquidity measure in our analysis.t − POTMP . t − ∆ ATMC . Cooper et al.t −1 is the OTM call price change from day t − 1 to day t. t where dPOTMP. Accordingly.t = POTMP . DVolOTMC . t −1dFt − C ATMC .t − ∆ OTMC . t −1 . t − ∆ ATMC . 1975).t −1DVol ATMC .000 SEK trading volume of the OTM put (call) and the ATM call: (5) dPOTMP.t are the trading volumes (in 1.t POTMP.t −1 is the OTM put price change from day t − 1 to day t. t −1 are the deltas for the OTM put. and ∆ ATMC . OTM call. ∆ OTMP.t = COTMC . and DVol ATMC . each put and call 18 .studies (see Dubofsky and Groth. In addition. associated with 1. dCOTMC . and Martin. and dFt is the underlying futures price change at from day t − 1 to day t. t −1dFt − C ATMC .

3. P C ( LM 3 ) can be interpreted as an increase in the daily OTM put (call) option An increase in LM 3 price response associated with a trading volume of one thousand SEK. and Duque and Teixeira. (1992). 19 . which implies a lower relative liquidity of the OTM put (call) relative the ATM call. resulting in a higher IV of the OTM put (call) relative to the ATM call (generating a positive option happiness). 2003). relative to the daily ATM call option price response. we expect a positive relationship between LM 3 and option happiness. Das and Sundaram. we use a dynamic regression model specification.2 Regression models To investigate the impacts of relative option liquidity on option happiness. In each delta calculation. they would charge a relative higher option price for the OTM put (call). In addition.option delta equals N (− d1) and N (d1 ) respectively. Bollerslev et al. a persistence property may be anticipated in option happiness as well. we use the realized index return volatility over the most recent sixty trading days as a proxy for the volatility rate σ t . which is often referred to as the IV term structure (see e. Moreover. and consequently. and Poterba and Summers (1986). the larger the difference in trading volume adjusted delta-hedging errors between the OTM put (call) and the ATM call. we include time to maturity as a control variable since many studies report that the volatility smirk has a time to maturity effect.g. 18 See e. More specifically. if market makers face larger delta-hedging errors in the OTM put (call) rather than the ATM call. we include the lagged option happiness and lagged relative liquidity measures as control variables in the regression framework. The dynamic framework is motivated by previous studies finding evidence of return volatility clustering and persistence of volatility. 1999.18 Thus. where the daily development of option happiness depends on the contemporaneous measures of relative option liquidity. the larger put (call) option happiness will be. Hence.g.

βi. The regression model in equation (6) is designed to test the effect of each different relative liquidity measure on option happiness. 2. α i. Thus. j LM ij . Timet is the option time to maturity on day t.t = α i.Our basic regression model is specified as: (6) OH i. j + βi. represents the three different relative liquidity measures from equation (3) through (5).t +1 where the index i = P and C represents option happiness for the OTM put and OTM call respectively as in equation (2).t +1 . j .t is a corresponding regression residual term on day t.t . j LM ij . and ui. j .t and LM ij . obtain the measures OH i.t + δ i. The other relative liquidity measure j = 3 (the inter-temporal price impact measure) already involve the calculation of option hedging errors from day t to day t + 1 according to equation (5).t for j = 3. and 3. a test 20 . jTimet +1 + ui. δ i. Formally. j OH i. j . γ i. Our main purpose is to investigate whether relative option liquidity across moneyness helps explain the time variation in option happiness. the index j = 1. Therefore. and follow the same option contracts to the following day t + 1 to obtain OH i. the regression equation (6) will not include the variable LM ij . we find the OTM put or call and corresponding ATM call option on day t. φi.t +1 − φi. The regression analysis of the dynamics of option happiness and relative liquidity according to equation (6) will follow the same individual option contracts from day t to the following day t + 1 . for each combination of option happiness i and relative liquidity measure j = 1 and 2 (the relative bid-ask spread and relative trading volume measures).t +1 and LM ij . j . j are coefficients in each regression equation of option happiness i on relative liquidity measure j.t +1 + γ i. j . j .

Within the where φi′ .of the statement that liquidity measure j has no contemporaneous impact on option happiness measure i. can help improve the prediction of option happiness.t = α i′ + ∑ βi′.t +1 j =1 j =1 3 2 ′. δ i′ are regression coefficients. In addition. boils down to test the following null hypothesis: (7) H1 : βi. Our different liquidity measures may capture different dimensions of relative option liquidity.t + δ i′Timet +1 + ui′. j LM ij. j = 1 and 2. In order to jointly investigate the relative liquidity effects on option happiness. j = 0 against the alternative that βi. j = 0 against the alternative that γ i . βi′. α i′ . j ≠ 0 . each lagged relative liquidity measure is included in the regression model (6). to examine whether the each of the first two relative liquidity measures explored in this study.t +1 − φi′OH i. Consequently. j . j . and ui extended regression in equation (9) it is possible to perform individual tests of whether each relative liquidity measure affects option happiness contemporaneously by testing the hypothesis 21 . we extend the regression model in equation (6) to: (9) OH i.t +1 + ∑ γ i′. j ≠ 0 . γ i′.t is a residual term. j LM ij. we test the hypothesis that the relative liquidity measure j has no predictive power for the option happiness measure i: (8) H 2 : γ i.

also obtained from NASDAQ-OMX. j coefficient. Similarly. including information of futures and options quotes (closing bid-ask quotes. The one-month Stockholm Interbank Rate (STIBOR) is 22 . and trading volume (number of traded contracts) for each option and futures contract. a joint test of the null hypothesis that none of the first two relative liquidity measures has predictive power for option happiness is: (11) H 4 : γ i′. j coefficient.t has predictive power for option happiness by testing the corresponding hypothesis in equation (8) for each γ i′. last transaction prices. j ≠ 0 . Moreover. 3 against the alternative that at least one β i′. 2. and individual tests of whether each of the i i two relative liquidity measures LM1 . 2 against the alternative that at least one γ i′. 3.according to equation (7) for each βi′.3 Data The data set consists of daily closing prices for OMXS 30 index options and futures contracts from January 2. Additional data. j = 0 for all j = 1. 2005. include daily OMXS 30 index values for the sample period. daily high and low transaction prices). obtained from NASDAQ-OMX. 2004 to December 30. we perform the joint test of the null hypothesis that none of the relative liquidity measures has a contemporaneous effect on option happiness: (10) H 3 : β i′.t and LM 2. j = 0 for all j = 1. j ≠ 0 .

02 (larger than -0. Specifically. on the seventh day before expiration.riksbank. the very deep ITM and the very deep OTM options are discarded. deep ITM calls (puts) with option delta larger than 0. we retain 7. 2002). The number of daily observations equals 506 in the dynamic regression setup. In addition. we require the options to be traded on two consecutive trading days. We include all options with time to maturity between one week to six weeks that have non-zero trading volume and non-zero bid-ask quotes. Empirical results 4.336 option contract observations after the data screening. since they are seldom traded. Following most studies in this field. The data used in the dynamic regression analysis consists of daily observations on the nearest-toexpiration options and futures with at least one week left to maturity.19 The data used in describing the properties of volatility smirk pattern satisfy several screening requirements. 4.98) and deep OTM calls (puts) with delta less than 0. and is downloaded from the Riksbank’s website. 20 19 23 .se The reasons are: (1) the time value of very short-lived options relative to their bid-ask spreads is small. we switch to the next corresponding contract in the maturity cycle.used as a proxy for the risk-free rate of interest.20 Since the dynamic analysis.98 (less than -0.1 The properties of the volatility smirk in OMXS30 index options www. follows the same option contracts from one day until the following trading day. In all.02) are dropped. and calculation of option happiness and relative liquidity measures. and (2) the set of traded strike prices shrinks as expiration approaches (Ederington and Guan.

a put with a delta of -0.In order to illustrate the volatility smirk pattern for the OMXS30 index options. In addition.g. both OMXS30 index calls and puts show clear evidence of an implied volatility smirk.81%. Following Bollen and Whaley (2004). the category 3 (ATM) options comprise about one third of the total observations while category 1 and category 5 options together only represent around 10% of the total observations. 21 For each moneyness category. The results are reported in Table 1. e. the average IV. The call options show a strictly decreasing IV pattern across the moneyness groups. is decreasing over the option categories 1 through 4. but increases in category 5 (deep ITM puts). Note that the average IV of the deep ITM calls is 17. As can be seen in Figure 1. where the average relative IV is plotted over the five option categories. For calls and puts alike. about 24% higher than the average IV of deep OTM calls of 13. The reason for grouping the options by deltas instead of the conventional simple moneyness.336 observations fall into one of the five moneyness groups. where Panel A (B) contains the results for the calls (puts). the strike to current futures price ratio. using the figures in Table 1.18%. we use the option delta as the classification criterion as shown in Table 1. For both calls and puts.1540). all of the delta pairings for the calls and puts are based on put-call parity.125 should have the same implied volatility as a call with a delta equal to 0.1647) and the average IV for ATM call options (0. we classify the options into five moneyness categories.875. 24 21 . relative the concurrent ATM call IV. the corresponding IV pattern for put options is decreasing between categories 1 and 4. Moreover. For example. and increasing between categories 4 and 5. In total. we have only 40 deep ITM put observations. The corresponding average call option happiness measure can be calculated as the percentage difference between the average OTM call IV As explained in Bollen and Whaley (2004). the average put option happiness can be inferred on an option category basis from the percentage difference between the average IV for OTM put options (0. is that the former takes into account the fact that the likelihood of the option being exercised not only depends on moneyness but also on the time left to maturity and the volatility rate. In particular. 7. we compute the average IV for calls and puts separately over the entire sample period.

and the same maturity. Thus.0000 (0. we use the more distinct definition of option happiness on a specific day.1505). with a corresponding estimated mean of -0.23 In addition. put option happiness is on average positive. the average put (call) option happiness is about 7% (-7%) over the sample period. 24 A formal t-test of the hypothesis that the average put (call) option happiness equals zero results in a p-value of 0.1447). Table 2 contains summary statistics for the option IVs and option happiness measures. for both calls and puts.0000).0382.1659. With the subsequent analysis of option happiness in mind. i. using an OTM put (call) and an ATM call with a fixed strike price difference. all three option types are on average approximately equally actively traded. 4. we follow an ATM call. in equation (2). In addition. a rejection of the hypothesis at any reasonable significance level.1434) and the average ATM call IV (0.1540).0000). a rejection of the hypothesis at any reasonable significance level. 24 Note however that these averages include all options in each moneyness category.1115. As can be seen in Table 2. Though. whereas call option happiness is on average negative.e. with an estimated mean equal to 0. The average trading volume figures clearly indicate that OTM and ATM options are more actively traded than the ITM options. the average OTM put IV equals 0.2 Summary statistics for option happiness and IVs We next focus on the options used in our dynamic regression analysis. 25 22 . with the lowest level for ITM options. Thus. irrespective of maturity.22 Table 1 also reports the average daily trading volume and relative bid-ask spread for each call and put option category. on a daily basis. an OTM put and an OTM call to the subsequent trading day. In our following analysis. and calculate each call and put option happiness measure according to equation (2). i. which in turn is about 4% higher than the average OTM call IV (0.0000 (0. we note that the OTM calls and OTM puts on average have wider relative bid-ask spreads than the ATM calls. 23 A formal t-test of the hypothesis of equality between the average OTM put (call) IV and the average ATM call IV results in a p-value of 0.e. which is about 10% higher than the average ATM call IV (0. the average relative bid-ask spread shows a U-shaped pattern over the moneyness categories.(0.

0756 and an average trading volume of 2. compared with an average 26 . which enable us to use these time series directly in the dynamic regression analysis. Hence.These figures lend support to our observation of a significant smirk pattern in the OMXS30 index options. Using the p-values from MacKinnon (1996). 1996) is used to test each individual null hypothesis that the time series has a unit root. 4. In general. We also show the corresponding development of the ATM call IV. However. Table 2 also presents the results from a unit root test for stationarity of each variable. Figure 2 illustrates the time series properties of call and put option happiness over the sample period.408. while the ATM call IV behaves relatively smoothly. and trading volume for the OMXS30 index options used in the dynamic regression analysis. it is possible to reject each null hypothesis of a unit root for put and call option happiness at any reasonable significance level. we consider the option happiness variables to be stationary. This is further confirmed in our data with an average relative bid-ask spread of 0. In addition. and put option happiness more dramatically than call option happiness. put option happiness is with few exceptions always above zero. An augmented Dickey-Fuller test (see Fuller. while call option happiness is mostly below zero. each corresponding null hypothesis for the IV variables cannot be rejected at the 5% significance level. the ATM options are regarded as the most liquid options. A prominent characteristic of this figure is that option happiness evolves dramatically over time.3 Summary statistics for the relative liquidity measures Table 3 provides summary statistics for the relative bid-ask spread.

indicate that delta-hedging errors per 1.25 Table 4 provides summary statistics for our three relative option liquidity measures. a rejection of the hypothesis at any reasonable significance level.0446).0457). due to a relatively wider bid-ask spread.0000).0570 (0.0414 (0. Our second relative liquidity measure pertains to the relative difference in trading volume P C between the OTM put (call) and the ATM call. P C From Table 4. Using the reported t-test (z-test).1% (5%) significance level. the mean LM 2 . the OTM (median) LM 1 call exhibits a significantly lower liquidity (wider bid-ask spread) than the ATM call. In both Panel A and B. denoted as LM 2 ( LM 2 ) in Table 4. Except for P the median LM 2 . each mean and the median is significantly different from zero at any reasonable A formal t-test of the hypothesis of equality between the average relative bid-ask spread for the OTM put (call) and the ATM call results in a p-value of 0. no evidence is found in Table 4 to support a significantly non-zero second relative liquidity measure. a formal t-test of the hypothesis of equality between the average trading volume for the OTM put (call) and the ATM call results in a p-value of 0. The same observation can be made in Panel B. In addition. than the ATM call.000 SEK trading volume are larger for the OTM put (call) than for the ATM call.relative bid-ask spread for the OTM put (call) of 0. where Panel A (B) contains statistics for measures of the OTM put (call) relative the ATM call. 27 25 .e.e.0003 (0. i. using the test results from Panel B.150). the positive mean and median LM 3 ( LM 3 ).1326) and an average trading volume of 1. it is possible to reject the hypothesis of a zero mean (median) at any reasonable significance level. Neither the P C C mean LM 2 .955 (2. In Panel A. Likewise. nor the median LM 2 is significantly different from zero at any reasonable significance level. the P estimated mean (median) LM 1 equals 0.1170 (0. a rejection of the hypothesis at the 0. indicating that the OTM put is significantly less liquid.0315). which is significantly negative at the 5% significance level.0000 (0. where the estimated mean C equals 0. i.

However. From Panel A. since this measure is significantly correlated with each of the first two relative liquidity measures. The estimated pair-wise correlation coefficients in Panel B of Table 5 exhibit the same signs as the corresponding coefficients in Panel A. where low liquidity is indicated by a wide spread and low trading volume respectively. all relative liquidity measures can be used in the subsequent dynamic regression analysis without further transformations. the measure of the dimensions of relative option liquidity across moneyness. Although P the coefficient is significantly different from zero at the 1% level. In addition. Thus. and estimated at -0. we P P and LM 2 is significantly different from zero note that the correlation coefficient between LM 1 at the 1% significance level. at a very low significance level.1185. whereas in the subsequent dynamic regression analysis of put option happiness.significance level. but are larger in magnitude and without exception significantly different from zero. at a very low significance level. LM 3 difference between delta-hedging errors per 1. and LM 2 measures the corresponding relative difference in trading volume. each relative liquidity measure is regarded as a stationary time series since each unit root test results in a rejection of the null hypothesis of a unit root at a very low significance level. and might therefore be measuring different P . it still indicates that LM 1 and P LM 2 are far from perfectly (negatively) correlated. Table 5 shows pair-wise correlations between the relative liquidity measures. where Panel A (B) contains statistics for measures of the OTM put (call) relative the ATM call. between the OTM put and the OTM call. The negative sign of the coefficient is P P reasonable since LM 1 measures the relative difference in bid-ask spread. our three relative liquidity measures are 28 . Hence.000 SEK trading volume of the OTM put (OTM call) and the ATM call is less likely to add a further dimension of relative liquidity to our analysis.

In the put (call) option happiness equation. and constitutes a measure of the contemporaneous impact of LM 1 on option happiness. we are more likely to be able to discern between the effects of the different relative liquidity measures. Hence.1 ) coefficient equals zero at the 0. adding autoregressive residual terms in a stepwise fashion to take residual autocorrelation into account. From Table 6 we also see that the estimated γ P. and is (not) significantly different from zero at the 10% significance level.1% (5%) significance level. and are less likely to encounter multicollinearity problems.1 ( β C . Each regression model is estimated using non-linear least squares. The positive sign is P C consistent with our expectations: an increase in LM 1 ( LM 1 ) implies that the relative liquidity of the OTM put (call) to the ATM call deteriorates.1 ( β C . In each stepwise analysis. Using the formal test outlined in equation (7). based on relative bid-ask spreads. where in the former specification.likely to represent different dimensions of relative liquidity.0444). and the reported t-statistic and p-value in Table 6. Table 6 presents the results from the regressions of put and call option happiness on liquidity measure LM 1 . and thus causes higher option happiness. the extended regression model in equation (9) is potentially more appropriate for put option happiness than call option happiness. we can reject the null hypothesis that the β P.1168 (0. Hence.0108). today’s relative 29 .1 ( γ C . we add autoregressive residual terms until the BreuschGodfrey serial correlation LM test shows no autocorrelation (up to 10 lags) left in the residuals.0788 (0.4 Regression results We start our dynamic analysis of option happiness by estimating the basic regression models according to equation (6).1 ) coefficient equals 0. the estimated coefficient β P. This P C coefficient measures the impact of the lagged LM 1 ( LM 1 ) on put (call) option happiness.1 ) equals 0. this is less likely in the corresponding analysis of call option happiness. 4.

Moreover. which indicates that the OMXS30 index options market displays a more pronounced smirk when the options approach the maturity date. The coefficient φ P . The negative relationship between option time to maturity and the steepness of the volatility smirk. including lagged C LM 1 does not significantly help the prediction of option happiness. Das and Sundaram. at the 1% significance level.3063. with an estimated δ P. The estimation results of the dynamic regression equations presented in Table 6 show clear evidence of persistence in both put and call option happiness.1 coefficient. Each 30 . the current level of option happiness appears to contain significant information of the future level of option happiness. is not significantly different from zero at any significance level. Bollerslev et al. The results in Table 6 reveal a significantly negative relationship between put option happiness and option time to maturity.1 ( φC . Duque and Teixeira. 2003). 1986). i. 1999. is consistent with the findings in previous studies (see e. measuring the relationship between call option happiness and maturity. The positive relationship between option happiness and lagged option happiness also corroborates the findings in previous research (See e.option liquidity in terms of observed relative bid-ask spreads contains some information about future put option happiness.e. Thus. 1992. another sign of persistence in each equation is the large number of residual lags required for passing the Breusch-Godfrey LM test..g. based on the scaled trading volume ratio. in terms of prediction. Poterba and Summers. that volatility tends to be highly persistent in short time intervals.1 ) of the lagged put (call) option happiness is significantly positive at a very low significance level. in the equation for call option happiness.g. are presented in Table 7. The corresponding δ C . However. the options are dying smiling. The results from the estimations of the regressions of put and call option happiness on our liquidity measure LM 2 . represented by put option happiness.1 coefficient equal to -0.

whereas the corresponding coefficient β P. The positive sign of in particular the coefficient in the put 31 .1% significance level. the β P. 2 and β C . the higher trading activity in the OTM call relative to the ATM call would reduce the risk of holding large C net positions in the OTM call compared to the ATM call. Moreover. The significantly negative C sign of the coefficient for LM 2 in the call option happiness equation is consistent with the idea that market makers generally interpret the relatively high trading volume in index options as trading activity driven by normal liquidity traders rather than informed traders.000 SEK of trading volume. Table 8 contains the results from the regressions of put and call option happiness on LM 3 . the coefficient β C .3 ) coefficient is positive and (not) significantly different from zero at any reasonable significance level. the coefficient of lagged LM 2 is not significantly different from zero at any reasonable significance level. induces a lower call option happiness. for each put and call option happiness equation. As can be seen in Table 8. In this case.estimated coefficient β P. The remaining coefficients in each equation in Table 7 resemble the corresponding ones from Table 6. 2 in the call option happiness regression equation is significantly negative at the 0. 2 in the put option happiness equation is not significantly different from zero at any reasonable significance level. In Table 7. which also can be interpreted as the relative deltahedging error per 1. The third liquidity measure LM 3 is based on the inter-temporal option price movement associated with 1.000 SEK of trading volume of the OTM put (call) to the ATM call. both with respect to the coefficient levels and their significance.3 ( β C . 2 is negative. Thus. an increase in LM 2 implies that the relative liquidity of the OTM call to the ATM call is improved and hence. which implies that the current relative option trading activity holds little information content about future option happiness.

Hence. in the put (call) option happiness equation. An increase in LM 3 is an indication of lower relative option liquidity in the OTM put to the ATM call. whereas the corresponding lagged effects do not. which consequently implies a higher IV of the OTM put option relative to the ATM call. Having a closer look at the individual coefficients for the relative liquidity measures in Table 9. Market makers would charge a higher price for the OTM put option with larger delta-hedging errors per 1. Accordingly. the contemporaneous effects from the relative liquidity measures persist in the joint dynamic framework. that none of the first two relative liquidity measures has predictive power for option happiness.1 ( β P ′ . each corresponding null hypothesis from equation (11). we employ the multivariable dynamic setup according to equation (9). whereas the β P significantly different from zero at any reasonable significance level. for both put and call option happiness. These results confirm the results from the corresponding basic regression analyses. including all the relative liquidity measures and control variables. is performed using a Wald-type chi-square test. as formalized in equation (10).000 SEK of trading volume.3 ) coefficient in the put option happiness equation is significantly we observe that the β P ′ . and recognizing that the different measures may capture different dimensions of liquidity. In our effort to investigate relative liquidity effects on option happiness. 32 .P option happiness equation is in accordance with our expectations. presented in Table 6 through 8. cannot be rejected at any reasonable significance level. the null hypothesis is rejected at a very low (the 1%) significance level. The regression results are displayed in Table 9. ′ .1%) significance level.2 coefficient is not different from zero at the 5% (0. However. The joint test of the null hypothesis that not a single relative liquidity measure has a contemporaneous effect on put (call) option happiness. and would according to our results lead to a significant increase in option happiness.

the corresponding relative difference between the options’ bid-ask spreads. Nevertheless.3 coefficients in However. when comparing the estimated levels for the significant β P the joint regression in Table 9. 2 coefficient liquidity measures into the joint dynamic specification. is associated with a significant coefficient in the basic regression setup in Table 6.1 and significantly different from zero at the 5% significance level. 0.1153 respectively. confirms our notion that the implied volatility smirk is generated by relative option liquidity.′ . 33 .1 are not significantly different from zero at any reasonable significance level.1457. we observe that the β C ′ . from Table 6 through 8. our liquidity measures are likely to capture different dimensions of relative option liquidity.1168 and 0. it is not a significant determinant of call option happiness in the joint dynamic regression model.0876 and 0.2 (0. However. since LM 1 and LM 3 are associated with significant coefficients in both the separate models for put option happiness according to equations (6) through (8).1 and β P ′ . 2 coefficient is In Table 9. and the joint model in equation (9). we notice that the joint regression framework produces somewhat lower coefficient estimates (and higher significance levels). whereas the coefficients β C ′ . ′ . with the corresponding estimated basic regression coefficients 0. Moreover.0280) in the basic regression model in Table 7. Moreover. the fact that put option happiness is still significantly related to contemporaneous relative liquidity. Therefore.0226) is only slightly lower (in absolute terms) than the corresponding estimate of β C . call βC option happiness is still significantly related to LM 2 . whereas LM 1 . for the call option happiness equation. it is fair to conclude that the effect from LM 2 ( LM 1 ) on call option happiness is (not) robust against including all relative ′ . Thus. the estimated β C (-0. measured by relative bid-ask spreads and volume-adjusted relative delta hedging errors. the relative trading volume difference between the OTM call and the ATM call option.

put option happiness is significantly related to the difference between the relative bid-ask spreads. We use two option happiness measures in order to cover as large part of the volatility smirk. Thus. as possible. In a market where options with different moneyness are traded at different degrees of liquidity.In all. unlike in the pseudo world of theoretical option valuation. Interestingly. First. as displayed in Figure 1. a larger liquidity difference between the OTM put option and the concurrent ATM call option leads to a larger option happiness. options’ markets exhibit constraints to arbitrage and perfect hedging. In particular. The idea behind the alleged relationship between option happiness and liquidity rests on the notion that in reality. which of course implies a relatively higher (lower) volatility for options with low (high) liquidity. Concluding remarks We investigate the dynamic relationship between relative option liquidity and option happiness (the steepness of the implied volatility smirk). of the OTM put and the ATM call option. market makers are likely to quote option prices including a liquidity premium. we measure put option happiness as the relative difference between the implied volatility of an out-of-the-money put and the implied 34 . and as wide range of option moneyness. We argue that our liquidity measures capture different dimensions of option liquidity. and the trading volume-adjusted delta-hedging errors. is affected by different dimensions of relative option liquidity for category 2 options (to the left in Figure 1) and category 4 options (to the right) respectively. whereas call option happiness only is significantly affected by the difference in trading volume between the OTM call and the ATM call. 5. options with relative low (high) liquidity are expected to be relatively higher (lower) priced. the slope of the implied volatility function. daily option happiness (the steepness of the volatility smirk) is significantly dependent on the concurrent relative liquidity between option series with different moneyness. Accordingly.

using e. Bollen and Whaley (2004) and Gârleanu et al. Once the researcher believes he/she has found the correct measure of liquidity. Hence. focusing on the relative liquidity between option series with different moneyness. Our purpose. our corresponding measure of call option happiness is obtained as the relative difference between the implied volatility of an out-of-the-money call and the implied volatility of an at-the-money call. our analysis is not contaminated by potential biases from averaging implied volatilities and relative liquidity over several option contracts. we develop comprehensive measures of option liquidity. and contribution to previous work. 2002. Liquidity is notoriously difficult to measure.g. Third. First.g. and volume adjusted relative delta hedging errors (an option version of Amihud’s. Second. e. illiquidity measure in relative sense). relative trading volume. the bid-ask spread as a proxy for the market width. depth. which allows us to investigate the dynamic properties of a large part of the implied volatility smirk. Our 35 . out pops three other dimensions. Second. taking the multi-dimensionality of liquidity into account. We also find significant differences in liquidity between options with different moneyness. which no one has done before us. calling for the use of multiple liquidity proxies. almost like the hydra of financial markets. Unlike previous studies. Our findings show a significant implied volatility smirk and a time-to-maturity effect in the Swedish index options market. immediacy and resiliency.volatility of an at-the-money call. For this purpose. (2007). we include three different relative option liquidity measures in our dynamic analysis of option happiness. is at least threefold. we document the volatility smirk for the Swedish index options market. we analyze the dynamic relationship between option happiness and relative option liquidity. we introduce the concept of option happiness. with identical maturity. These effects appear to be persistent over the entire sample period. relative bid-ask spreads.

Journal of Financial Markets 5. Journal of Financial Economics 77. 375-410. we find that higher put option happiness is accompanied with less time to maturity of the options. 2002. This relationship is stronger for our put option happiness measure than for the call option happiness measure. and L.. Asset pricing with liquidity risk. Bibliography Acharya. Amin. and H. where a large difference in liquidity between an out-of-the-money option and a corresponding at-the-money call option induces large option happiness. Illiquidity and stock returns: cross-section and time-series effects.. Amihud. Accordingly. 1993. Pedersen. 881-910. Asset pricing and the bid-ask spread. Option valuation with systematic stochastic volatility. 31-56. Ng. Thus. and V. Journal of Finance 48. 2005. Mendelson. 1986. consistent with previous studies. put option happiness is significantly related to the relative difference in bid-ask spreads and the relative volume-adjusted delta-hedging errors.. Amihud. In addition. K. whereas call option happiness is significantly related to the relative difference in trading volume between the option pair. V. Y. Y. the Swedish index put options are showing a tendency for “dying smiling”. Journal of Financial Economics 17. 223-249. 36 .main results show that daily option happiness is significantly dependent on our relative liquidity measures..

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0732 0.625 −0.0938 -0.1647 0.1719 0.0118 481 713 1.02 < ∆ C ≤ 0.625 < ∆ P ≤ −0.1718 0.152 1.903 1.875 < ∆ P ≤ −0.1652 0.2274 0.0040 -0.0159 1. 2004.875 0.375 < ∆ P ≤ −0.125 −0.0952 0.138 741 40 0.0829 0.Table 1: Average implied volatility.625 0.0027 -0.1093 Table 1 presents average daily implied volatility.02 −0.125 < ∆ P ≤ −0.0786 0.375 −0.155 0. during the period from January.1545 0. relative implied volatility (relative difference between each implied volatility and the ATM call volatility for the same day).2488 0.2723 0.0428 -0.281 218 0.875 343 1.125 < ∆ C ≤ 0.1255 0.953 1.1039 -0.375 0.98 0.0402 -0.1614 0.5545 Panel B: Put Options 1 2 3 4 5 Deep OTM Put OTM Put ATM Put ITM Put Deep ITM Put −0.1718 0.1434 0.0782 0.875 < ∆ C ≤ 0. trading volume and relative bid-ask spread Category Label Delta Range Number of Observations Implied Volatility Relative Implied Volatility Trading Volume Relative Bid-Ask Spread Panel A: Call Options 1 2 3 4 5 Deep ITM Call ITM Call ATM Call OTM Call Deep OTM Call 0. and for different categories with respect to option delta.1512 0.308 1.334 1. and the relative bid-ask spread (absolute bid-ask spread divided by the midpoint quote) for all call and put options in our sample. .295 339 178 0. 2005.927 1. trading volume (number of traded contracts). Each option delta is calculated using the Black (1976) model and the realized index return volatility over the most recent sixty trading days as a proxy for the volatility rate.25 144 971 1.1381 0.98 < ∆ P ≤ −0.1540 0.625 < ∆ C ≤ 0. to December.375 < ∆ C ≤ 0.

0992 0.1115 0.1856 0. put option happiness ( OH OTMP ).0000 503 Table 2 presents summary statistics for daily implied OTM put volatility ( σ OTMP ).0382 -0.1940 503 OH OTMP 0.0338 0. a MacKinnon (1996) one-sided p-value under each null hypothesis is reported.0341 0.1395 0. and call option happiness ( OH OTMC ) for the data used in the regression analysis. OTM call volatility ( σ OTMC ).0357 0.0835 0. For each series.2573 0. The augmented DickeyFuller test (Fuller.1620 0.1041 0.0517 0.0797 503 σ OTMC 0.0353 0. 1996) is performed to test the null hypothesis that each time series has a unit root.2455 0.0350 0.1659 0. 2004. 2005.0526 503 σ ATMC 0. to December.2537 0. ATM call volatility ( σ ATMC ).1459 0.0893 0.0000 503 OH OTMC -0.4974 -0.1505 0.0701 0. during the period from January.Table 2: Summary statistics for implied volatility across moneyness and option happiness Statistic Mean Median Maximum Minimum Standard Deviation Unit Root Test (p-value) Number of Observations σ OTMP 0.1447 0. 44 .1050 -0.

45 .408 1. and the OTM call ( RS OTMC ).2857 0. the ATM call ( RS ATMC ).343 0. The augmented Dickey-Fuller test (Fuller.0157 0.0000 503 RS OTMC 0. a MacKinnon (1996) one-sided p-value under each null hypothesis is reported. during the period from January.0000 503 Table 3 presents summary statistics for daily relative bid-ask spread for the OTM put ( RS OTMP ). to December.0694 0. 2004.0000 503 RS ATMC 0.0779 0.5455 0.0714 0.0000 502 VolOTMC 2.313 20 2. and daily trading volume for the OTM put ( RS OTMP ).293 35 2. and the OTM call ( RS OTMC ).1053 0.Table 3: Summary statistics for relative bid-ask spread and trading volume over time Statistic Mean Median Maximum Minimum Standard Deviation Unit Root Test (p-value) Number of Observations RS OTMP 0.0230 0.019 0. For each series.370 5 2.0000 503 VolOTMP 1.1326 0.0165 0.0351 0. 1996) is performed to test the null hypothesis that each time series has a unit root.150 1.955 1.0000 503 Vol ATMC 2.775 17.350 17. 2005.0756 0. for the data used in the regression analysis.255 0.1176 0.1170 0.426 22. the ATM call ( RS ATMC ).6667 0.

and LM 3 ( LM 3 ).0000 499 Table 4 presents summary statistics for the relative liquidity measures for the data used in the regression analysis.0000 0.0000 0. 46 .1008 0.0801 0.0699 0.0000 0.2724 0.Table 4: Summary statistics for the relative liquidity measures Panel A: The OTM put relative the ATM call Statistic Mean t-test Mean = 0 (p-value) Median z-test Median = 0 (p-value) Standard Deviation Unit Root Test (p-value) Number of Observations P LM 1 P LM 2 P LM 3 0. 2005. P C ( LM 1 ).4443 -0.0315 0.0172 0.0229 0.0000 503 0.0194 0.0414 0.0090 0. is the difference between the relative bidduring the period from January.0000 503 -0.0054 0.0000 0.0383 0.0000 0.0000 0.0000 0.1046 0.0446 0. LM 1 P C ask spreads of the OTM put (call) option and that of the ATM call option. is the difference between delta hedging errors per 1.0019 0.1750 0. to December.0000 502 0. For each series. a MacKinnon (1996) one-sided p-value under each null hypothesis is reported. LM 2 ( LM 2 ) is the scaled OTM put P C (call) to ATM call trading volume ratio in logarithms.0570 0. 2004.0205 0.000 SEK trading volume of the OTM put (OTM call) and the ATM call option. 1996) is performed to test the null hypothesis that each time series has a unit root.0000 502 0.0596 0.1592 0.8089 -0. The augmented DickeyFuller test (Fuller.0000 0.0000 499 Panel B: The OTM call relative the ATM call Statistic Mean t-test Mean = 0 (p-value) Median z-test Median = 0 (p-value) Standard Deviation Unit Root Test (p-value) Number of Observations C LM 1 C LM 2 C LM 3 0.

47 .0000) -0.000 SEK trading volume of the OTM put (OTM call) and the ATM call option.0000) Panel B: The OTM call relative the ATM call C LM 1 C LM 2 C LM 2 -0. The t-test statistic equals r (n − 2) /(1 − r 2 ) . during the period from January.0000) Table 5 reports pair-wise correlations (p-values in parentheses) for the relative liquidity measures for the data used in P C the regression analysis.2 degrees of freedom.3571 (0.2772 (0.Table 5: Pair-wise correlations between the relative liquidity measures Panel A: The OTM put relative the ATM call P LM 1 P LM 2 P LM 2 -0. 2004.4580 (0. Each p-value stems from a t-test of the null hypothesis of a zero correlation coefficient. is the difference between delta hedging errors per 1. 2005. LM 2 ( LM 2 ) is P C the scaled OTM put (call) to ATM call trading volume ratio in logarithms.0000) C LM 3 0. to December.0081) P LM 3 0.3679 (0. is the difference P C between the relative bid-ask spreads of the OTM put (call) option and that of the ATM call option. LM 1 ( LM 1 ).3021 (0. which under the null hypothesis (r = 0) approximately follows a t-distribution with n .0000) -0.1185 (0. and LM 3 ( LM 3 ).

1.3283 1.k ui.0000 0.i Table 6: Results for regression of option happiness on liquidity measure LM1 Put option happiness ( OH P.2917 0.1.3618 6.0111 0.1.4672 -1.t +1− k k =1 K where the index i = P and C represents option happiness for the OTM put and OTM call respectively.9869 0.7291 2.1489 p-value 0. Data are from the period January. t + δ i .1.856 -1. 2004.1 δ i.0444 0. The model equations are: i i OH i .2732 2.1 θ i.4628 -0.0813 0.1LM 1.0000 Call option happiness ( OH C .1739 0.1 .0010 0.7 Adjusted R-Squared Breusch-Godfrey LM-test (p-value) 0.0009 0. and Newey and West (1987).1168 0.0680 0.6608 p-value 0.0684 0.1 .1.8643 2.1Timet +1 + ui . γ i .5303 -0. 48 .5378 0.1 γ i.t +1 = ei .2703 t-value 4.5495 2.1.1 are coefficients in each regression equation of option happiness i on relative liquidity measure 1.6395 -0. φi .0830 t-value -3.1 β i.1 .0000 0.8806 3.1328 0.0154 0.5372 7. where the standard errors are corrected for heteroskedasticity and autocorrelation in the residuals according to White (1980).1872 α i. t +1 ) Estimate -0. The coefficients are estimated with non-linear least squares and ARMA method.t +1 − ∑θi.t is a corresponding regression residual on day t.1OH i .0115 0.1.1.1 θ i.1LM 1 .t = α i .1215 0.0788 -0.8506 4. t +1 + γ i .3063 0. Timet is option time to maturity on day t.0002 0. and ui .0108 -0. t +1 ) Coefficient Estimate 0.0165 12.0000 0.3 θ i. t +1 ui .1084 i Table 6 contains estimation results from option happiness ( OH i .0000 0. β i .0846 0. δ i .0201 0.1.1 φi. 2005. to December.1 + β i .4046 0.t +1 − φi .1. t +1 ) on liquidity measure LM 1 .6437 0.0235 0. α i .0629 0.1 .0444 0.2 θ i.0322 0.8288 -2.

9814 2. The coefficients are estimated with non-linear least squares and ARMA method. 2004.6192 -0.6626 -0.1550 0. Timet is option time to maturity on day t.3 θ i . 2 LM 2.0001 0.2.4729 0.0074 0.2 are coefficients in each regression equation of option happiness i on relative liquidity measure 2.4304 15.9205 -3.0000 0. 2005.643 -6.9643 0.0938 11.1 θ i . 2Timet +1 + u i .5208 0. to December. t is a corresponding regression residual on day t.2OH i . t +1 ) Coefficient Estimate 0.1416 0.6196 -0. t + δ i . 2. δ i .0003 -0.2 θ i. t +1 ) on liquidity measure LM 2 .7202 p-value 0.0155 0.0864 1.0247 -2.7183 -0.2 γ i . and ui . γ i .0828 t-value 3.i Table 7: Results for regression of option happiness on liquidity measure LM 2 Put option happiness ( OH P.6915 1. The model equations are: i i OH i . α i .2 .2 .2 .4434 0. φi .0058 0.4048 0. Data are from the period January. 2 θ i .0004 0.1070 α i.9312 0. 2 .0000 0.2.2 φi. 49 . k ui.0448 0.2 + β i .2.2 δ i.0280 0.0048 0.t +1− k k =1 K where the index i = P and C represents option happiness for the OTM put and OTM call respectively.0000 0.0003 0.0366 -0.0173 -0. t +1 ) Estimate -0. and Newey and West (1987). 2.0006 0.0674 t-value -3.3780 -0. t = α i .2 LM 2 . t +1 ui . β i .9253 0.9803 0.0737 i Table 7 contains estimation results from option happiness ( OH i . t +1 − φi . where the standard errors are corrected for heteroskedasticity and autocorrelation in the residuals according to White (1980).0030 0.2.2.7 Adjusted R-Squared Breusch-Godfrey LM-test (p-value) 0.t +1 − ∑θ i.0953 0.8579 -0.0908 0. t +1 = ei .2.6949 p-value 0.6717 2.0861 Call option happiness ( OH C .0725 0.2 β i. 2 .903 -0.0099 -0.2266 0.2 . t +1 + γ i .

278 -2.0012 0.6576 -0.3.4226 6.1631 t-value 6.3.3 are coefficients in each regression equation of option happiness i on relative liquidity measure 3.3789 -1.0171 0.4877 -0. 50 .7 Adjusted R-Squared Breusch-Godfrey LM-test (p-value) i Table 8 contains estimation results from option happiness ( OH i .2708 0.2562 Call option happiness ( OH C .3 LM 3 .3. t +1 = ei . Timet is option time to maturity on day t.0607 13. 2004.0000 0.0229 0.3.0129 0.3. Data are from the period January.3 θ i. t +1 ) on liquidity measure LM 3 .3Timet +1 + ui .4519 7.0890 0.1025 -0.3OH i .2 θ i.2666 p-value 0.3.9516 0. t is a corresponding regression residual on day t.0000 0. The coefficients are estimated with non-linear least squares and ARMA method.3301 -3.3. t +1 ui .8269 3.0002 0.5614 0.3 + β i .0035 0. and Newey and West (1987).7863 1.1555 0. t +1 + δ i .9693 p-value 0. 2005. t +1 ) Coefficient Estimate 0.3 .3 β i .0000 0. t +1 ) Estimate -0.3 .1457 -0. δ i .t +1− k k =1 K where the index i = P and C represents option happiness for the OTM put and OTM call respectively. t +1 − ∑θ i.3475 0.2313 0.3198 5.0000 0. The model equations are: i OH i .3 φ i .0792 0. β i .5745 3.1456 α i .0495 0.t = α i .0000 0.3 δ i .3.2685 0.0991 0. and ui .1 θ i. t +1 − φi .0233 -0.i Table 8: Results for regression of option happiness on liquidity measure LM 3 Put option happiness ( OH P.0758 t-value -3.3. to December.3 θ i. φi .3 .1242 0.1220 0.3976 0.2833 1.0222 0.4966 2.2944 2.3.k ui. α i .0006 0. where the standard errors are corrected for heteroskedasticity and autocorrelation in the residuals according to White (1980).0001 0.

8875 p-value 0.0696 0.0067 0.5177 -0.0278 0.1153 0.8802 -0.t +1− k k =1 where the index i = P and C represents option happiness for the OTM put and OTM call respectively. j .3251 0.2748 t-value 6.t +1 − φi′OH i .2 β i′. Data are from the period January. and ui′. φi′ .0776 0.0347 -0. to December.2 θ i′.1 θ i′.0036 0.5774 2. t is a corresponding regression residual on day t. α i′ . 2005.0000 0.4081 0.8272 0.0000 0. 3 (p-value) Test of H 4 : γ i′.5705 1.0597 0.0206 0. Timet is option time to maturity on day t.8697 -3.0000 0. The coefficients are estimated with non-linear least squares and ARMA method.1387 0.0038 0. t +1 ) on all liquidity measures LM ij .0002 0.t +1 = ei′. k ui′.1825 Table 9 contains estimation results from option happiness ( OH i .2 δ i′ φi′ θ i′.3 γ i′.Table 9: Results for regression of option happiness on all liquidity measures Put option happiness ( OH P. j = 1.2680 4.1654 3.0138 0.0876 -0.116 -1.5691 0.6599 0.0226 -0.0006 0. t +1 ) Estimate -0.4634 0. δ i′ are coefficients in regression equation of option happiness i. β i′. j = 1.8687 0.1321 0.9230 2. 2 (p-value) Adjusted R-Squared Breusch-Godfrey LM-test (p-value) 0. j = 0 . j = 0 .0003 0.t +1 + K ∑ γ i′.0581 0.2184 12.3849 0.3 θ i′.0000 0. 2.9095 0. 51 .4414 8.0749 t-value -3. and Newey and West (1987).1540 0.7639 1.5565 0.0110 0. j LM ij. j LM ij .8335 0.1 β i′. 3 represents relative liquidity measure LM j .t +1 − ∑θi′. 2004.0105 0.0120 0.3475 0.4404 0.6433 0.0000 Call option happiness ( OH C .7 Test of H 3 : β i′.0121 0.1173 0.5086 -2.0059 2. 2.t = α i′ + ∑ j =1 β i′.1 γ i′.0114 -0.1074 α i′ β i′.4336 -0.t +1 j =1 ui′.6592 0.6157 -0. t +1 ) Coefficient Estimate 0.0000 0. where the standard errors are corrected for heteroskedasticity and autocorrelation in the residuals according to White (1980).1154 0.1137 0.t + δ i′Timet +1 + ui′.0026 0.0024 0.5234 -0.6206 1. The model equations are: 3 2 OH i.9042 p-value 0. j = 1.4519 6.1455 0.

. 2005 0.3 Implied Volatility relative ATM Call Volatility 0.2 Calls Puts 0.. 2004. to Dec.Figure 1: Volatility smirk for OMXS30 index options from Jan.1 0 -0.1 1 2 3 4 5 Option Moneyness Category 52 .

2004. to Dec.3 0.2 0..4 0. 2005 53 ..6 0 -0.1 Figure 2: Option happiness and ATM call IV from Jan.5 0.Option Hapiness (OH) and ATM Call IV 0.1 0.2 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 ATM Call IV OH OTM Call OH OTM Put -0.

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