In this thesis, Implied volatility patterns are investigated for options on the KOSPI 200 using the transaction prices of the nearest maturity contracts. Significant negative skew patterns are often observed for call options and positive skew patterns are often observed for put options. This can be explained by the fact that the KOSPI 200 declined about 37% throughout the observation period.
I examine whether spread trading strategies can successfully arbitrage the smile. Assuming no transaction costs, I find that spread strategy can produce abnormal profit. When transaction costs are considered, the returns turned out to be negative because of abnormally high level of the bid-ask spreads in the KOSPI 200 options market.
