It is well documented that following the stock market crash in 1987 the prices of options started to demonstrate skew and smile in the distribution of implied volatilities. This feature has been present in equity markets ever since. Could a future event change the shape of the implied volatility distribution again?


closed as not constructive by Tal Fishman, olaker Aug 7 '11 at 13:26

As it currently stands, this question is not a good fit for our Q&A format. We expect answers to be supported by facts, references, or expertise, but this question will likely solicit debate, arguments, polling, or extended discussion. If you feel that this question can be improved and possibly reopened, visit the help center for guidance. If this question can be reworded to fit the rules in the help center, please edit the question.

  • $\begingroup$ The shape of the implied vol curve is an artifact of how it is calculated. The BSM assumes lognormal returns and constant vol, neither of which actually exist in equity markets. So I guess to approach the question, one has to ask why the skew exists in the first place. The second question I suppose then is what shape might you expect it to take? $\endgroup$ – strimp099 Aug 6 '11 at 23:49
  • $\begingroup$ It is not just the shape of the implied volatility curve that changed after the crash, but rather the physical distribution of stock prices. Options prices adjusted to reflect the new reality. Presumably, if the stock price distribution changed again, options prices would change as well. However, all this is speculation, and I believe this question is not in scope, as it is not a practical, answerable question. $\endgroup$ – Tal Fishman Aug 7 '11 at 2:12