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Why Futures and ETF Option Implied Volatilities Can Differ

Article Quant Q&A · Author: Jay C
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Summary

The document explains why options on E-mini S&P 500 futures may show different implied volatility from options on the SPY ETF, despite both being linked to the S&P 500. The underlyings and contracts are not identical: they have different trading hours, contract characteristics, liquidity, and price behavior. Futures reflect expected prices at a future date and can diverge from spot, while historical volatility comparisons can also differ depending on the instruments and closing times used.

Implied volatility comparisons depend on moneyness and expiration as well as market conditions, and there is no universal rule that futures options are more volatile or expensive. Longer-dated options often have higher implied volatility when markets price greater future risk or uncertainty, but the term structure can slope downward too, as during periods when near-term risk is elevated. These observations are therefore context-dependent; the document does not provide a stable pricing rule or evidence that one contract is always more expensive. Contract and exercise-style differences between SPY and related index options further complicate comparisons.

Key ideas

  • Futures and ETF options reference different underlyings with different trading hours and contract characteristics.
  • Futures prices can diverge from spot because they reflect expectations about future prices.
  • Implied volatility comparisons depend on moneyness, expiration, liquidity, and the instruments being compared.
  • An upward-sloping volatility term structure can reflect greater perceived risk farther into the future, but the slope can reverse.
  • Differences between ETF, futures, and index options complicate direct price comparisons.

Tags

OptionsFuturesVolatilityDerivatives pricing
Full text
# IV on FOP (futures options) being higher than IV on equivalent ETF


# IV on FOP (futures options) being higher than IV on equivalent ETF












I've been observing that options on /es has a higher IV than the options on SPY even though they're both tracking the S&P 500. What causes this? Doesn't this mean that the options on /es is more expensive in general than the SPY?

Also, why do longer-dated expiration options have higher IV?

## Answer by AKdemy (score 2)

https://quant.stackexchange.com/a/66161

These observations do not hold through time or moneyness in general. A few remarks below:

EMINI and SPY are not the same underlying! The CME has a document highlighting some key differences.

Trading hours:

SPY: Primary exchange for SPY options is in San Fran and local trading hours are 6:30 - 16:15 according to Bloomberg.

ES - Emini options on CME trade from 17:00 - 16:00 local hours.

Now ignoring everything else, more time is more potential for movement. If you simply compare daily historical vol (SD of log returns) of SPY US Equity vs ES1 index (stringing together active contracts over time), you see a noticeable difference in hist vol of daily close as well.

While there is a well defined relationship between spot and futures contracts, they can deviate and be priced higher or lower because they represent "expected" future prices rather than current prices. October, 1987 was an extreme example. The DEC contract was 18% less than the S&P500 Index at one point.

Also, it really depends on moneyness and tenor as well (liquidity will play a role, as does contract size).

SPY and SPX itself are also not identical (the former are American, the latter European and despite de-Americanizing them for surface creation, there will be differences).

With regards to the term structure, that is not generally applicable. Frequently, it is upward-sloping, which implies that investors expect to see the volatility (risk) of the market going up in the future. Or put differently, it seems reasonable to predict near term changes with a greater degree of certainty compared to something in the distant future (bit like weather forecasts). However, look at March last year, short term vol was a lot higher than long term vol.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.