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Sticky Stock Charts

Sticky stock charts involve PhD. fortune-tellers, witch lights, Swarovski crystal balls, a dozen mad master mathematicians, and a fantastic sense of the absurd. As one might expect of a peculiarity in the American market not observed until after the crash of 1987.

According to Wikipedia, "the volatility smile is a long-observed pattern in which at-the-money options tend to have lower implied volatilities than in- or out-of-the-money options. The pattern displays different characteristics for different markets and results from the probability of extreme moves. Equity options traded in American markets did not show a volatility smile before the Crash of 1987 but began showing one afterwards.

"A closely related concept is that of term structure of volatility, which refers to how implied volatility differs for related options with different maturities. An implied volatility surface is a 3-D plot that combines volatility smile and term structure of volatility into a consolidated view of all options for an underlier."

Understand, we're talking here of a smile that's really just like a line-drawing of a smile. So now, proceeding with Wiki's torturous explanation: "In equity markets, a small tilted smile if often observed near the money as a kink in the general downward sloping implicit volatility graph. Sometimes the term 'smirk' is used to describe a skewed smile."

Hold on, folks, we're almost there. "An implied volatility surface is static: it describes the implied volatilities at a given moment in time. How the surface changes over time (especially as spot changes) is called the evolution of the implied volatility surface."

Okay, check your seatbelts, we're coming in for a landing. "Common heuristics include: 'sticky strike' (or 'sticky-by-strike' or 'stick-to-strike'); if spot changes, the implied volatility of an option with a given absolute strike does not change 'sticky moneyness.'

"So if spot moves from $100 to $120, sticky strike would predict that the implied volatility of a $120 strike option would be whatever it was before the move (though it has moved from being OTM to ATM), while sticky delta would predict that the implied volatility of the $120 strike option would be whatever the $100 strike option's implied volatility was." Yeah.

If all that isn't perfectly clear, it's difficult to conceptualize what could possibly render it more startlingly obvious.

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