Size rotation in the U.S. market acording to implied volatility predictive power

Abstract

Exchange Traded Funds (ETFs) and the options that are traded on them, have increasingly rise in popularity over the last years. In most of cases, financial options are employed by professional and individual investors in order for them to construct a portfolio strategy. Despite the fact that passive portfolio strategies are supposed to result in profits, active ones, such as size rotation portfolio strategies are considered more beneficial, yielding greater profits, in the portfolio management community. Since the volatility smirk has been demonstrated to capture public option market exploitable information, the predictive power of the volatility smirk on ETF options in the U.S. option market and its ability to generate profits when applied to size rotation portfolio strategies is what this study deals with.