Derivatives Strategy

Europe Market Commentary 11 November 2008

Stanislas Bourgois, CFA

+ 44 20 7888 0459
Derivatives Strategy
Raymond Hing
+ 44 20 7888 7247
Trading the volatility skew

Key Points Volatility and the volatility skew

! In our last volatility outlook Now its the Economy, Definitions
dated 3rd November, we suggested buying Dec08 Volatility is defined in a number of ways. We can estimate it from
put spreads, making the point that current inflated options quotes (implied volatility), or we can determine it from
levels of the volatility skew were pricing in too high a historical time series data (realised volatility). Implied volatility is a
probability of a market collapse now that we have measure of what the market expects the assets volatility will be in
moved to a more familiar recessionary environment. the future. It is determined using the volatility that gives you the
! With this new publication we show that in the current market options prices when used as an input to a pricing model
environment, there is mutual interest from trading such as binomial/trinomial trees or the famous Black Scholes
desks to buy the skew, and from more traditional model. As such, a vol trader may calculate different values for the
investors to sell it to them. implied volatility depending on the option type (put or call), the
expiry or the strike level departing from the somewhat simplistic
! While single stock volatilities and skews stem from
Blach Scholes model which assumes log normality of returns and
credit risk, index skew adds another dimension to it:
identical volatilities for all strikes and maturities.
macro risk through the correlation skew.
! Index volatility and skew tend to be highly correlated, Exhibit 1 shows at two dates (November 2007 and November
but skew has gained a life of its own over the last 2008) the level of DJ Eurostoxx 50 (SX5E) implied volatility for
weeks, and the mispricing has now reached 4.7 different strikes expressed as a percentage of the spot. Exhibit 2
standard deviations, a strong incentive to sell skew displays on those two dates the implied probability distribution
as a hold-to-maturity investment. derived from the observation of the implied volatility skew. As
shown on Exhibit 1, implied volatility tends to be higher for lower
! The opposite side of this trade (long skew) is
strikes (where traded options tend to be put options, not calls) as
profitable in an environment when volatility of
volatility traders tend to implicitly put more risk on large downside
volatility and correlation with spot are high.
moves partly because of the higher observed occurrence of
! Vol of vol is now at decade highs, making index extreme moves on the downside, and also partly because of the
skew a nice hold for trading desks, which enjoy extra premium that traditional investors agree to pay for buying
trading platforms that are efficient enough to capture portfolio protection.
P&L from remarking volatilities and trading the
gamma on an intraday basis. As shown on Exhibit 2, an increase in volatility for all strikes
flattens the implied distribution (as it renders all possible price
occurences more equally likely). A higher slope for the volatility
skew will proportionally give more probability to downside moves.
Exhibit 1: SX5E 3M implied volatility skew Exhibit 2: SX5E 3M implied distribution

Higher vol higher slope

Source: ACEA, Credit Suisse

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Derivatives Strategy

Looking at skew in the delta space

In the remainder of the report, we will refer to skew as being the
spread between downside volatility and at-the-money or upside
volatilities.
There is no consensus way to look at volatility skew. The common
(and easiest way) involves looking at the spread between the
implied volatility priced in at a lower strike (typically 90% of spot)
and an at-the-money or upside strike. A higher value would
indicate a higher probability of extreme moves.
However, we believe that this particular computation of the
volatility skew may be misleading, in particular when comparing
different levels of absolute volatility, such as comparing skew when
volatility is at 20% or when volatility is at 40%. For the former
case, reaching the 90% strike in say 3 months bears only a 16%
probability and volatility at that level should include a premium for
extreme event. Comparatively, the probability for the latter case to
reach that level is over 30% and this would therefore constitute a
routine event. Looking at just the difference in volatilities across
two arbitrarily chosen strike levels may over-estimate skew when
volatility is low, or under-estimate it when volatility is high such as
now.
A cleaner computation would look at implied volatility levels for a
given delta, delta being the options hedge ratio, but also a proxy
for the (risk-neutral) probability of reaching the strike or below from
current spot price. A 10% delta would therefore be consistent with
a low strike (typically a deep out-of-the-money put option) while a
90% delta would be consistent with a high strike (typically a call
option). 50% delta would be more or less at-the-money.
As shown on Exhibits 3 and 4, both calculations yield a very
different results for the SX5E 3-month skew since 2000. In
particular, in the 2004/2006, low-volatility environment, using
fixed strikes to calculate skew badly overestimated the actual level
of skew. Using skew in the delta space also highlights the current
record levels of skew that followed from Octobers hectic moves.
Exhibit 3: Spread: SX5E 80% strike vs 120% strike vol. Exhibit 4: Spread: SX5E 30 Delta vs 70delta vol
25 18

16

20 14

12
15
10

8
10
6

5 4

0 0
02/03/00 13/03/01 25/03/02 07/04/03 20/04/04 29/04/05 11/05/06 23/05/07 04/06/08 02/03/00 13/03/01 25/03/02 07/04/03 20/04/04 29/04/05 11/05/06 23/05/07 04/06/08
Source: Credit Suisse Derivatives Strategy

2
 Derivatives Strategy

Exhibit 5: SX5E 3M skew: clean calc. vs proxy Incidentally, there is acleaner way to calculate skew, still using
18 1600 fixed strike volatilities. For instance, using 90% and 100% strike
16 Clean calc.
Proxy (rhs)
1400
volatilities: Skew = (90% vol 100% vol) x 100% vol. Multiplying
by the level of volatility penalises the calculated volatility skew
14
1200
12

10
1000
when volatility is low, while inflating it when volatility is high,
8
800
therefore correcting the afore-mentioned volatility bias. As shown
6
600
on Exhibit 5, this gives results that are very close to the clean
4
400
calculation although at an entirely different scale but without the
2 200
hassle of having to calculate volatility skew in delta space.
0 0

Single stock skew driven by credit

02/03/00 13/03/01 25/03/02 07/04/03 20/04/04 29/04/05 11/05/06 23/05/07 04/06/08
Source: Credit Suisse Derivatives Strategy
Both single stocks and indices exhibit positive volatility skew. As
shown on Exhibits 6 and 7, credit and leverage are important
drivers of the absolute level of volatility, but also and more
importantly, of the volatility skew. The correlation of DJ Stoxx 50
constituents with fundamental leverage ratios such as Debt to
Equity or Debt to Capital with volatility is roughly 60%, while
correlation with the skew is no less than 80% (here in the absence
of delta volatility data, we calculated skew as the difference
between volatility one vol point down and one vol point up from
spot, a proxy for 30 delta/70 delta skew).
Exhibit 6: Correlation of 3M vol and skew vs leverage ratios Exhibit 7: SX5P constituents skew vs Debt/Capital
60

Vol Skew 50
Debt/Equity 60.6% 78.2%
40
Debt/Capital 55.1% 83.7%
Skew

Interest Coverage -35.1% -49.8% 30

20

10

0
0 0.2 0.4 0.6 0.8 1 1.2
Debt to Capital

Source: Credit Suisse HOLT, Credit Suisse Derivatives Strategy

Why is skew higher on indices?
Exhibit 8 next page shows the implied volatility for strikes between
60% and 140% of spot, for the SX5E index and its largest
constituent, Total SA. The volatility skew, as is (almost) always the
case, is higher on the index than it is on the single stock.
One important constituent of index volatility is, indeed, correlation,
or the tendency of stocks to move in conjunction. A high
correlation would yield a high index volatility. Normal economics of
correlation tells us that correlation tends to increase when the
market moves down, thereby increasing index volatility on the
downside. As shown on Exhibit 9 next page, implied correlation
has its own skew as well!
Overall, single-stock volatility skew is related to idiosyncratic
factors, in particular default risk for the lowest levels of the strike.
Index volatility skew incorporates single-stock skews, and adds an
extra dimension, correlation. A higher correlation implies a higher

3
 Derivatives Strategy

level of macro risk, in turn increasing index volatilities and the index
volatility skew.
Exhibit 8: SX5E and Total SA 3M volatility skews Exhibit 9: SX5E 3M Implied correlation skew
80 90

70 SX5E 80
TOTF.PA

60 70

50 60

40 50

30 40

20 30
60% 70% 80% 90% 100% 110% 120% 130% 140% 60% 70% 80% 90% 100% 110% 120% 130% 140%

Source: Credit Suisse Derivatives Strategy

Are skew and vol the same thing?

ATM vols and skew are hardly discernable
Exhibit 10: SX5E ATM vols vs 30d/70d skew As shown on Exhibit 10, variations in at-the-money volatilities and
60 18 variations in the 30-delta/70-delta volatility skew have tended to
50D Vol
16 match very closely since the beginning of 2000. Correlation
50
30D - 70D Skew (rhs) 14 between the two stands at 89% over the period, a strong sign that
40 12
volatility and skew may actually be driven by the same factors.

30
10
PCA analysis
8
In order to provide an answer to this question, we look at the
20 6 dynamics of implied volatilities for different levels of delta but
4 identical, rolling maturity. Our objective is to find only a handful of
10
2 factors that will explain almost all variations of implied volatility of all
0 0
options with the same maturity and in particular explaining the
02/03/00 13/03/01 25/03/02 07/04/03 20/04/04 29/04/05 11/05/06 23/05/07 04/06/08 overall level of volatilities and the volatility skew.
Source: Credit Suisse Derivatives Strategy
For investigations involving a large number of observed variables, it
is often useful to simplify the analysis by considering a smaller
number of linear combinations of the original variables. Principal
Components Analysis, or PCA, finds a set of orthogonal (that is,
independent) linear combinations, deemed the Principal
Components, which together explain the variance of all of the
Exhibit 11: SX5E vols: factor 1 loadings original data.
0.45

0.4 Both vol and skew explained by same factor

0.35 Looking at SX5E 3-month volatilities for all deltas between 10%
0.3 and 90%, we find that only one factor (factor 1) can explain
Factor loading

0.25 99.4% of all variations in the implied volatility for all deltas.
0.2
As shown on Exhibit 11, the factors loadings (basically the
0.15 sensitivity of implied volatilities to factor 1) is positive for all deltas.
0.1 It also tends to decrease linearly for higher deltas. Overall factor 1
0.05 is therefore having a direct impact on both the general level of
0 volatility AND the volatility skew, with a high reading in factor 1
10d 20d 30d 40d 50d 60d 70d 80d 90d translating into high vols and higher skew. This is the reason for
Delta
Source: Credit Suisse Derivatives Strategy the high correlation we spotted just a few lines above.

4
 Derivatives Strategy

Pure skew moves = 0.54% of variations

The second factor we found explains only 0.54% of variations.
Exhibit 12: SX5E vols: factor 2 loadings Factor 1 and factor 2 only leave 0.06% of variations explained so
0.6
we believe to have a strong model.
0.4
Factor 2 is your pure skew factor. As shown on Exhibit 12, factor
0.2
2 is roughly neutral for the average level of volatility. However it
tends to have a negative effect on lower deltas and positive effect
Factor loading

0 on higher deltas. We interpret it as the inverted skew where a

10d 20d 30d 40d 50d 60d 70d 80d 90d
-0.2
low reading would imply a high level of the skew.

-0.4
Our conclusion from PCA analysis is that volatility and skew tend
to be the same thing. Only on rare occasions does skew actually
-0.6 gains a life of its own and that specific trades could be put in place
to capture it.
-0.8
Delta
Source: Credit Suisse Derivatives Strategy
Trading the skew with vanilla options
Put options and option combinations
" A put option is a derivative offering its holder the right (not the obligation) to sell a predetermined asset at a predetermined strike price at
a predetermined date in the future. Payoff at expiration is therefore:
" Max ( 0, Strike Spot)
" A put option is said to be out-of-the-money if the spot trades over the strike price, at-the-money if it trades at the strike, or in the money
if it trades below the strike price (that is, the option would have positive pay off if we were at expiry).
" Given that the payoff of the put option is always positive, the trade can only be entered at a premium the seller being rewarded for
taking the risk to have to buy the stock at an unfavorable price in the future.
" By buying/selling put options with different strikes, an investor can get sophisticated exposure to the share price that are not available to
the long or short only investor, at a cheaper premium than a single put option, or even at a credit.
" Example of such combinations include put spreads (long one near-the-money put and short one out-of-the-money put), 1x2 put spreads
(long one near-the-money put and short two out-of-the-money puts), or vega-neutral put spreads where just enough out-of-the-money
puts are sold to create a zero sensitivity to moves in volatility.

Getting exposure to the volatility skew

From the simplified definition of the implied volatility skew
(basically, the difference between implied volatility at different
levels of the strike), trading a view on skew involves buying vanilla
options at a given strike, and selling options at another strike.
Examples of such trades include risk reversals, where a vol trader
would buy for instance a put option struck at 80% of spot and sell
a call option struck at 120% of spot. Here the trader would be
long volatility at 80% of spot and short at 120% of spot. Overall
he would be roughly neutral on the general direction of the volatility
level, but positively exposed to changes in the spread between
80% and 120%-strike volatilities (long skew). The payoff of the
risk reversal is provided in Exhibit 13. Conversely, selling the risk
reversal would make the trader short skew.
Another potential skew trade is put spreads, where the trader
would buy say an 80%-strike put option and sell an at-the-money
put option (see Exhibit 14).

5
 Derivatives Strategy

Exhibit 13: SX5E 3M 80%/120% risk reversal Exhibit 14: SX5E 3M 80%/ATM put spread

Source: Credit Suisse Derivatives Strategy

Delta hedging and gamma
Equity options have a sensitivity to changes in the underlyings
price (the delta). In order to get exposure to the volatility part of
the options price, a vol trader would have to cancel this delta by
going long or short index futures.
We look at a SX5E Dec08, 90% strike put option written on
1,000 SX5E index futures. We calculate that the put option has a
price of EUR77,000 (indicative vs ref 2,685) and a delta
equivalent to being short roughly 250 SX5E futures.
Contrarily to delta-one products such as futures or swaps,
options prices vary in a non-linear way. Typically, delta tends to
vary with the underlying price, as shown on Exhibit 16. Vanilla put
and call options see their delta increase when the underlyings
price increases, a property called convexity or positive gamma.
Exhibit 15: SX5E Dec08 90% strike put option price (%) Exhibit 16: SX5E Dec08 90% put option delta (shares)
1,000,000 SX5E spot price

900,000 1500 1750 2000 2250 2500 2750 3000 3250 3500 3750 4000
Option premium (EUR)

0
800,000

700,000 -200
Delta = +250 futures
Hedge = -250 futures)
Option delta (shares)

600,000
-400
500,000
New Delta = +390 futures
400,000
-600 New Hedge = -390 futures)
300,000
Convexity (gamma) P&L
200,000 -800
Delta = -250 futures
100,000
-1000
0
1500 1750 2000 2250 2500 2750 3000 3250 3500 3750 4000
SX5E spot price
-1200

Source: Credit Suisse Derivatives Strategy

If dynamically hedging the delta, an option trader can extract P&L
more or less independently of the direction of market movements.
Assuming the previous put option is hedged by going long 250
futures. If the SX5E drops to 2,500 (a 6.9% drop), and assuming
all else remains equal, the value of the option position jumps to
EUR134,000, or a P&L of EUR57,000.

6
 Derivatives Strategy

At the same time the hedge consisting of 250 futures will drop in
value by roughly EUR46,000 (or the change in the futures value
times number of futures: (2685 2500) * 250), leaving the trader
with an overall P&L of EUR11,000.
Exhibit 17: SX5E Dec08 put gamma summary Assume now that you re-hedge at the new delta of 390 shares,
Current SX5E at 2,500 SX5E back to 2,685 Total P&L and that the SX5E goes back to its starting point. Loss on the
Option premium 77,000 134,000 77,000 option position will therefore be EUR57,000, cancelling previous
Option P&L 57,000 -57,000 0 options gain. However, the gain on the hedge will more than make
Hedge (nbr futures) 250 (old)/390 (new) 390
up for the options loss: (2,685 2500) * 390 = EUR72,000,
Hedge P&L -46,000 72,000 26,000
Total P&L 11,000 15,000 leaving the trader with a net P&L on the SX5E rebound of
Source: Credit Suisse Derivatives Strategy
EUR15,000. Total net gain on the SX5E fall and rebound is
EUR26,000.
Overall, if the underlying moves enough between re-hedgings, the
cumulated P&Ls will more than compensate the initial premium
paid for the option and the net P&L will be positive. This happens
when subsequent realized volatility is higher than the implied
volatility at the time of pricing.
Conversely, a short gamma position (for instance here selling the
put option and hedging it by going short futures) would then have
a negative net P&L.

Long skew = short gamma (apparently)

We now turn to short skew trades and risk reversals in particular.
We look at a Dec08, 70%/120% strike risk reversal going long
the 70% strike put and short the 120%-strike call, a trade that
has a near-null premium (EUR1,185 for options on 1,000 futures).
Based on Exhibit 18 and 19, this is a trade that gives the
appearance of being short gamma. Current delta is -147 futures
meaning the options are hedged by going long 147 futures. If the
SX5E index goes down to 2,500 as in the previous example, the
new delta is -110 futures only and the new hedge will be long 110
futures only. A vol trader would therefore have to sell 37 futures
on the long hedge, locking up losses and we would be therefore in
a less favourable position if the SX5E was to rebound. The
position is short gamma.
Exhibit 18: SX5E Dec08 risk reversal price (%) Exhibit 19: SX5E Dec08 risk reversal delta (shares)
1,000,000 0
1000 1500 2000 2500 3000 3500 4000
800,000 -100 Delta = -147 futures
600,000 -200 New Delta = -110 futures Hedge = +147 futures)
New Hedge = +110 futures)
400,000 -300

200,000 -400

0 -500
1000 1500 2000 2500 3000 3500 4000
-200,000 -600

-400,000 Concavity -700

Delta = -719 futures
Hedge = +719 futures)
-600,000 -800

-800,000 -900

-1,000,000 -1000
Source: Credit Suisse Derivatives Strategy

7
 Derivatives Strategy

However we can also see that below 2,250, the risk reversal
Exhibit 20: SX5E change in 1M vol vs pct change in index actually regains some convexity. Should the SX5E fall down to
15 1,500, the new delta would be -719 futures, meaning we would
y = 0.107 - 1.009 * x
have to go long 572 futures to maintain our long hedge.
Change in fixed strike vol (vol points

10
Until 1st Sept
After 1st Sept
What if volatility is remarked?
5 However, the previous analysis disregards an important fact: when
the underlying plunges, volatility tends to be remarked. As shown
-10 -5
0
0 5 10 15
on Exhibit 20, on a fixed strike basis, SX5E 1-month implied
volatilities have tended to increase by as many vol points as
-5
percentage point the index fell. Although the relationship is
relatively loose (r-squared of the linear regression is only 18%), it
-10
Pct change in the index
cannot be ignored, in particular for extreme, down moves in the
Source: Credit Suisse Derivatives Strategy
index.
On Exhibit 21, we show how the delta on the risk reversal behaves
Exhibit 21: SX5E Delta: current vols vs vols up 10 vol pts when the overall level of implied volatility is remarked up by 10%.
0
1000 1500 2000 2500 3000 3500 4000
-100 Delta = -110 futures (no remark) Delta = -147 futures Reminder: at current prices the calculated delta on the risk reversal
-200
Hedge = +110 futures) Hedge = +147 futures) is -147, meaning the vol trader has to go long 147 futures to
-300
Current Vols hedge the options.
True Delta = -719 futures Vols up 10pts

-400 Re-Hedge = +719 futures) If the SX5E falls to 2,500 (same scenario than before when new
-500 delta was -110 futures), but if this time the vol trader remarks
-600
volatilities up by 10 volatility points, the actual new delta will be -
182. A delta of a larger scale had to be expected, since the put
-700
option would now have a larger probability of ending in-the-money
-800 according to the new implied volatility.
-900
In order to maintain his hedge, the trader will have to buy another
-1000
Source: Credit Suisse Derivatives Strategy
35 futures where as if vols were not remarked, he would have had
to sell 37 futures a trade that is typical of long gamma, not short
Exhibit 23: Expected P&L from different vol scenarios gamma positions.
SX5E at 2,500/ SX5E back to 2,685/
Vols marked up Vols marked down Long vol of vol, short spot/vol correlation
Current 10 pts 10pts Total P&L
Option premium 1,180 22,300 1,180
Coming to P&L: assuming the SX5E falls to 2,500 and that
Option P&L 21,100 -21,100 0 volatilities are marked up 10 volatility points, the new price of the
Hedge (nbr futures) 14747 (old)/182 (new) 182 option position will be EUR22,300, roughly landing a P&L of
Hedge P&L -27,200 33,700 6,500
Total P&L -6,100 12,600 EUR21,100 on the options position. At the same time, the loss on
Source: Credit Suisse Derivatives Strategy the futures long hedge will be 147 * (2685 2500) = 27,200 so
net loss will be EUR6,100.
Exhibit 24: Expected P&L from different vol scenarios The position is re-hedged at the new delta of -182. If the SX5E
20,000
index returns to its starting point then net loss on the options
position will be EUR21,100 (cancelling the previous options gain),
Expected P&L from rehedging delta (EUR)

15,000
while P&L on the futures will be EUR33,700, landing a net gain
10,000 on the rebound in the SX5E of EUR12,600.

5,000
In total, the trader would be able to lock in a P&L of EUR6,500 on
the fall and rebound in the SX5E.
0
-5 0 5 10 15 20 Actually, the real driver of P&L in the above example is the scale
-5,000 of the remark in implied volatilities. Had the trader not remarked
volatilities before re-hedging, then he would not have been able to
-10,000
show any profit in the risk reversal. Exhibit 24 shows the P&L
-15,000
expected from a fall in the SX5E down to 2,500 followed by a
Change in fixed strike volatility (vol points)
Source: Credit Suisse Derivatives Strategy

8
 Derivatives Strategy

rebound, for different remarks in volatility. The traders P&L is

linearly related to the changes in implied volatilities, a property
known as long volatility of volatility or vol of vol.
Last, it is also related by the propensity of volatility to go up when
the spot goes down that is, short spot/vol correlation.

So long or short skew?

Exhibit 25: SX5E change
15
in 1M vol vs pct change in index Vol of vol at decade highs long skew?
y = 0.107 - 1.009 * x As shown on Exhibit 25, the SX5E index has seen extremes
moves both in spot as in implied volatility. Daily moves in the SX5E
Change in fixed strike vol (vol points

10
Until 1st Sept index over the last two months range from -7.9% to 11% while
5
After 1st Sept
changes in volatility (fixed strike) range from -8.3 to 10.3 volatility
points.

-10 -5
0
0 5 10 15
Exhibit 26 plots the SX5E vol of vol, defined as the volatility of
percentage changes in the fixed strike volatility, since 2000. SX5E
-5
vol of vol has now reached decade highs of over 75% after two
weeks of active index volatility remarking, higher than the 50%
-10
Pct change in the index peak reached during the 2002 credit crunch. This comes at a time
Source: Credit Suisse Derivatives Strategy
when spot/volatility correlation is also at a low level (Exhibit 27).

Exhibit 26: SX5E 1-month vol of vol (%) Exhibit 27: SX5E Dec08 risk reversal delta (shares)
90 0.8

80 0.6

70 0.4

60 0.2
50
0
40 04/02/00 02/02/01 01/02/02 31/01/03 30/01/04 28/01/05 27/01/06 26/01/07 25/01/08
-0.2
30
-0.4
20
-0.6
10
-0.8
0
04/02/00 02/02/01 01/02/02 31/01/03 30/01/04 28/01/05 27/01/06 26/01/07 25/01/08 -1

Source: Credit Suisse Derivatives Strategy

Overall it seems therefore that the environment would be ideal for
a vol trader to go long skew through risk reversals, as analysed in
earlier pages. However we also point that for long skew strategies
to be efficient, the vol trader has to be able to quickly remark
volatilities and execute changes in hedges. This means a perfect
access to pricing information and liquidity which is not available for
all investors unfortunately in practice restricting the strategy to
broker/dealers flow trading desks or investors enjoying cutting
edge trading platforms. However...

9
 Derivatives Strategy

Exhibit 28: SX5E PCA factor 2 Pure skew at decade highs short skew?
0.1
On Exhibit 28, we back-calculated the unobserved factor 2 (which
0.08
we defined as pure skew factor) based on factor loadings and
0.06
past implied volatilities. Factor 2 is now at decade lows of -0.08,
0.04
or 4.7 standard deviations below its average.
0.02
0 In our PCA analysis of the volatility skew on page 4, we mentioned
02/03/00 29/03/01 09/04/02 22/04/03 04/05/04 13/05/05 24/05/06 06/06/07 17/06/08
-0.02 that skew tends to be closely correlated to the overall level of
-0.04 volatility. Only in rare occasions does skew actually gain a life of its
-0.06 own and that specific trades could be put in place to capture it.
-0.08 This is apparently one of those moments. In our last volatility
-0.1 outlook Now its the Economy, dated 3rd November, we suggested
-0.12
Source: Credit Suisse Derivatives Strategy
buying Dec08 put spreads as a hold-to-maturity investment,
making the point that current inflated levels of the volatility skew
were still pricing in a high probability of a market collapse although
the financial crisis was being addressed and we had moved to a
more familiar recessionary environment.
With this new publication we showed that in the current
environment, there was mutual interest from trading desks to buy
the skew in order to trade the high vol of vol, and from more
traditional investors to sell it to them, potentially under the form of
put spreads, in order to benefit from better pricing stemming from
record-high skews.

10
 Derivatives Strategy

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Because of the importance of tax considerations to many option transactions,
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