Given market tick data for a single tenor for a futures and a set of options on the futures, how can I say if the IVs in the market at this point is closer to sticky strike or to sticky delta?
I was trying to solve the problem looking at change in the futures price and the comparing the change in IVs of the options but have run into issues when the options quote change is not in sync with the futures prices. I was wondering if anyone here has worked on similar problem and can share their ideas
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Re: Sticky Strike or Sticky Delta
I believe you won't be able to infer much, as sticky-delta versus sticky-strike is defined by the model and market-maker. And this pre-defined sticky-delta/strike is then complicated by the actual market-moves.
Consider, I've calibrated my model to existing market-prices in terms of IV (implied vols).
If I've defined my vol-surface, as ATM-vols and OTM risk-reversals/butterflies; then I make an explicit assumption (usually for stress-tests and delta/vega/gamma hedging) on whether to use sticky-delta, or strike * if * the markets were to move; in the generation of new implied-vol-surface. This is at time, T =0.
Now, at the next time-slice, and markets * have * moved, the new implied vol-surface will reflect the market-consensus of prob.dist at T = 1. If it was purely sticky-delta, the new ATM vol will be at the same level; if it was purely sticky-strike, the new ATM vols will be the level implied at strike K at time T= 0.
But the above never happens. Hence, market vols move in a behaviour where it is a mixture between the sticky-strike and sticky-delta. But it is the market-maker who will know (and have set) their models was from a sticky-strike/delta behaviour.
That's my two cents. It's possible to calibrate out the general ratio (0 to 1) of sticky-strike/delta the market is behaving as; but it is more involved.
Hope that helps!
Consider, I've calibrated my model to existing market-prices in terms of IV (implied vols).
If I've defined my vol-surface, as ATM-vols and OTM risk-reversals/butterflies; then I make an explicit assumption (usually for stress-tests and delta/vega/gamma hedging) on whether to use sticky-delta, or strike * if * the markets were to move; in the generation of new implied-vol-surface. This is at time, T =0.
Now, at the next time-slice, and markets * have * moved, the new implied vol-surface will reflect the market-consensus of prob.dist at T = 1. If it was purely sticky-delta, the new ATM vol will be at the same level; if it was purely sticky-strike, the new ATM vols will be the level implied at strike K at time T= 0.
But the above never happens. Hence, market vols move in a behaviour where it is a mixture between the sticky-strike and sticky-delta. But it is the market-maker who will know (and have set) their models was from a sticky-strike/delta behaviour.
That's my two cents. It's possible to calibrate out the general ratio (0 to 1) of sticky-strike/delta the market is behaving as; but it is more involved.
Hope that helps!
Re: Sticky Strike or Sticky Delta
Both sticky strike and sticky delta assumptions lead to arbitrage (see this https://math.unice.fr/~diener/nicemathf ... _1302c.ppt ). Both sticky strike and sticky delta are not consistent with how implied volatilities move in liquid competitive markets (btw, which underliers are you looking at?)
In many cases it is possible to imply the value of the future from an options snapshot.
In many cases it is possible to imply the value of the future from an options snapshot.