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tesla1060


Total Posts: 4
Joined: May 2019
 
Posted: 2019-06-18 03:28
I have run some regression of dIV against dS, I found for call (of all the strikes) is negatively correlated, but put if positively correlated. What is the reason for this?

My prior belief was that for otm call, it should be negatively correlated, iv decreases as the moneyness (K/S) decreases(or S increases), but for itm call, it should be positive, as itm part is sloped up on the way to the tail.

Any explanations?

nikol


Total Posts: 784
Joined: Jun 2005
 
Posted: 2019-06-18 07:18
EDIT: Scratched all what was written before. Total B/S. Sorry.


You look correlation < dC*dIV > (< . > =E[.]). In simplistic way it is = < vega*(dIV^2) > ~ vega.implied_variance. The same result should be for < dP*dIV >, hence I do not understand where the sign flip.

My guess is that you see asymmetry in bid-ask of IV for ITM and OTM along the smile. OTM options are not moving with dS, therefore, those have zero correlation.
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