Author(s)

Chen Huang, Xuanchen Zhang

Corresponding Author

Chen Huang

Abstract

Through comparisons of implied volatility and historical volatility of 50ETF options in Chinese option market, we find some options were mispriced when applying Black Scholes model. Therefore, we construct an options trading strategy that longing options with positive RI (historical volatility – implied volatility) and shorting options with negative RI. The empirical results indicate the cumulative return of strategy during sample period is almost 400 times higher than that of 50ETF fund and is robust to subsample tests.

Keywords

Implied volatility, Mental accounting, Option pricing