In index options, there was not much of a smile (on the put-side) until the 1987 market crash.

I'm wondering if the same applies to single name stocks? That is, do price crashes in individual stocks trigger smiles in their option surfaces?


1 Answer 1


Yes, it is very very common that implied vol, and particularty that of OTM puts, increases after crashes, even after limited losses.

A market maker will have a tendency to increase its volatility on the left side of a smile if a stock price drops, because the risk inherent to that stock is considered higher.

Hope it helps.

  • $\begingroup$ Thanks much. Are there any references, studies, or papers that document this? $\endgroup$ Commented Jun 15, 2021 at 16:06
  • $\begingroup$ You can have a look at the following sources : - sr-sv.com/modelling-the-relation-between-volatility-and-returns/…. -link $\endgroup$
    – Xomuama
    Commented Jun 16, 2021 at 9:13
  • $\begingroup$ I think the "notion" that you are referring to is the "volatility leverage effect". Check it out on google, you will find plenty of references. $\endgroup$
    – Xomuama
    Commented Jun 16, 2021 at 9:16

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.