Intraday Volatility Surface Geometry and Rebalancing Premia in Options
A new study finds that brief distortions in the implied volatility surface of S&P 500 equity options can predict short-term option returns. Options with unusually high implied volatility or expensive at-the-money prices earn lower returns in the next 30 minutes, while those with high curvature or cross-strike dislocations earn higher returns. These patterns, driven by dealer inventory rebalancing, do not appear in stock returns. The research uses advanced statistical methods but is limited to short-dated options.
What it examines
This paper studies whether short-term distortions in the implied volatility surface of equity options can predict 30-minute option returns. Using intraday data, it measures local volatility level, skew, curvature, and cross-strike dislocations, focusing on delta-neutral straddles to isolate option-specific return patterns.
What it concludes
The study finds that high curvature and cross-strike dislocations in the volatility surface lead to higher short-term option returns, while high volatility levels predict lower returns. These effects are strongest near market close and are not seen in stock returns. Applications include intraday trading strategies and risk management for option dealers.
Evidence objects
Options with unusually high implied volatility or expensive at-the-money (ATM) points earn lower 30-minute returns, while those with high curvature or large cross-strike dislocations earn higher returnscreating actionable trading opportunities.
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These predictive effects are unique to options, not underlying stocks, and are linked to inventory imbalances and dealer rebalancing. The study uses innovative measures like 'rebalancing premium' and advanced statistical techniques on S&P 500 options data.
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Short-lived, intraday distortions in the implied volatility surface of equity options can reliably predict short-term option returns, revealing a previously overlooked source of return predictability within a single trading day.
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This paper presents an original intraday option return predictability framework by analyzing distortions in the implied volatility surfaces cross-strike geometry over 30-minute horizons. Introducing novel local measures and linking them to dealer inventory rebalancing, it offers compelling, robust evidence of unique option premia, advancing volatility modeling beyond traditional equity-based or momentum approaches.
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Raw abstract and provenance
- … into economically meaningful premia over a trading day. These premia appear to be … trading, rather than through shorthorizon predictability in the underlying equities. …
Source row: 1124 · abstract type: snippet