Fixed/Sticky Strike vs Floating/Sticky Delta

Discussion in 'Options' started by VolSkewTrader, Jul 11, 2019.

  1. I trade a product that has a similar shaped IV curve to the SPX. I don't restrict myself to a fixed or floating skew but instead use an automated curve-fitting algo that generates precise and accurate smiles as fast as every second when there's enough bid/ask market data. Thanks to the algo, I don't have to model or predict the term structure or IV surface behavior for trading, but for position/inventory management I need to make accurate predictions for the level of IVs and behavior of my curves given a move in the underlying, which is challenging to say the least.

    My current product exhibits both sticky strike and sticky delta characteristics with semi-local volatility behavior depending on the direction, speed, and range of the underlying. Like the SPX my product's IV explodes on big gap moves down, and collapses on rallies - especially slow grinding ones. Unlike the SPX, my OTM puts actually steepen on a break, and on rallies the OTM calls often catch a bid relative to the OTM puts. So my curves typically steepen on a break, and flatten on rallies - opposite of the SPX (correct me if I'm wrong).

    I also noticed that on vol crushing rallies, when ATM IV finally finds a bottom, my curves start to float - exhibit sticky delta behavior. If we continue to rally, the ATM strike's IV stays the same, even though all the upside calls we're going through have decreasing IVs. So any upside call you're long is outperforming on rallies after the ATM IV bottoms out. Unfortunately, these sustained "vol-finding-a-floor" rallies mess up my local volatility assumptions, underestimating my call delta/gamma/vega/theta/vomma. Great when you initiate upside call longs after the vol implosion, but terrible if you sell them with the assumption that vol will continue to collapse on the rally.

    Was wondering if other traders have seen this phenomena in other products such as the SPX, other equity indexes, or equities in general...products which have a similar steep volatility smile and an inverse IV relationship to the underlying. I would imagine that the when the VIX bottoms out, the ATM IVs in the SPX start staying constant as the index continues to rally. As the market continues to rally, the SPX curve is no longer fixed but actually floating, and the discounted calls become screaming buys.
     
    Adam777 likes this.
  2. destriero

    destriero

    lol yes, only since 1987.
     
    Atikon likes this.