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VolSurface Dynamics

By “dynamics” we mean the changes in the implied volatility surface as the underlying spot price moves up or down.


It is a hot topic for active vol traders and a research subject for quants.

It is normally assumed that  the implied volatility at a given strike and expiry will decrease when the spot price of the underlying moves up, and viceversa

Over the last 20 years~ or so this has been the most common regime, which somehow tallies with the equity skew is (nearly always) negative, i.e. the implied vol at a given maturity increases with decreasing strike. 

While this is often the case, it is far from a constant behaviour.

For example, note the dynamics between march 2013 and april-may: spot up, vol up...  


Vol ATM 3mo

Vol ATM 2y

Skew

Spot

AsOf

SPX

13.8%

17.9%

-28.0%

1566.63

16-Apr-13

Eurostoxx

17.3%

20.7%

-19.2%

2814

21-May-13

FTSE100

12.1%

15.7%

-27.2%

6480.4

02-Apr-13

 

 

Vol ATM 3mo

Vol ATM 2y

Skew

Spot

AsOf

SPX

12.6%

17.3%

-26.8%

1549.63

08-Mar-13

Eurostoxx

16.5%

19.9%

-19.0%

2726.8

08-Mar-13

FTSE100

12.0%

15.6%

-25.2%

6469.25

08-Mar-13

We reported (see article in Reuters) a similar period between May and June 2013: in fact over the last couple of years the "spot up, vol up" dynamic has been quite common (causing losses at some vol-trading houses and hedge funds).  

This has probably been due to a decrease of demand for downside protection from the buy-side, with fund managers probably trusting the "Bernanke put", combined with a structural long skew position on the sell-side (driven by the issuance of structured products).

This new "regime" has persisted through 2014, with many cases of "spot up/vol up" or similar "spot down, vol down", while the older normal "spot down, vol up" comes back with a vengeance in period of more serious "wobbles", e.g. Aug-13, or end 2014.

 

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Disclaimers: all of the above is indicative and approximate, not to be used for investment purposes, should not be taken as solicitation to trade, etc

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