Abstract
•A unique right-skewed implied volatility curve is identified in the newly established Chinese options market.•Economic profits could be generated by exploiting the pattern of the average IV curve shape.•The shape of IV curves in the Chinese option market is related to investor's sentiment.
This paper analyzes the implied volatility (IV) curve of the SSE 50 ETF options, the first equity options market in mainland China. We quantify the IV curve and find it exhibits a right-skewed smirk shape, which is different to the left-skewed IV smirk shape shown in the international options markets and offshore options based on ETFs tracking large Chinese equities. Consistent with the right-skewed smirk shape, a delta-neutral option writing strategy generates higher profits from writing call options than put options. Finally, we show that the level and slope factors of the IV curve are related to investor sentiment.