Strange News From the Volatility Surface

Tim Klassen of Vola Dynamics updates Wilmott on the (vol) shape of things to come


“It was a rather exciting year,” Dr. Timothy Klassen, CEO of Vola Dynamics LLC, says with some understatement, as he reflects on 2020. Vola’s analytics library, which produces easy-to-use, tradeable, and real-time volatility surfaces, proved its reliability, even in the most challenging and unprecedented market conditions. With Vola’s analytics library delivering in the strangest of times, “for most players in the options ecosystem, the buy versus build decision has a pretty clear answer now, with very few exceptions,” Klassen states. Wilmott regulars will already be familiar with Klassen’s outfit. Vola provides analytics for options, trading, and risk management. Founded by a small team of experienced quant practitioners and traders, the company has established itself as a reliable third-party vendor providing top-tier options valuations, and analytics for vanillas and vol derivatives.

Strange New ‘W’’s

Klassen remarks on the weird phenomena that manifested in the first year of the pandemic. “Some of the interesting facts that became apparent are related to, of course, the extreme market conditions but also the increased retail participation – the Robin Hood crowd – in other words.” The influx of retail renegades “led to more extreme wings in vol surfaces of many underlyers, both in terms of the wider range of strikes that was traded, but also in terms of the volatilities in the wings themselves.” With these changes and conditions, it has shifted certain aspects of the market, demanding ‘fancier’ vol curves to fit the implied volatilities of many underliers.

“In particular, simple curves like SSVI, SVI, or SABR, work less and less often. Obviously, those curves have not worked for liquid equity names for 10 or almost 15 years at this point. But the fancier curves and shapes show up in more and more names these days.”

“Given what has happened in the political and economic sphere, there are more and more events where there is a binary or multimodal outcome. This leads to ‘W’ and other unusual vol curve shapes that have become very prominent last year. The simple curves I mentioned earlier simply do not allow one to fit those kinds of vol shapes. In fact, even more general vol curves used by many market participants were not able to fit SPX vol curves in March – the shapes were completely unprecedented, with ATM curvature being negative for all maturities and extremely steep near-call wings. We heard stories of banks not having an SPX vol surface for a full day or two in March because of this.”

As the changes become more apparent, and with a battle-proven library in place, Vola has a great vantage point to keep an eye on the latest developments in volatility modeling; Vola’s partnership with Jim Gatheral, most recently celebrated for his work on rough volatility and a member of Vola’s Advisory Board, helps too. Klassen reports, “Jim has been on our board from day one. I’ve known Jim for a very long time. We often worked on similar problems when we were both practitioners working for banks. Working with Jim has made it a lot easier to stay up to date with exciting developments in mathematical finance while we spend most of our time on the nitty-gritty business of running a financial software business. Jim has always been at the forefront of important practical work, as his work on vol surface modeling in the early 2000s and more recently, of course, his amazing work on rough volatility models exemplifies.”

Roughing It

“There are a lot of aspects to the question of modeling volatility,” says Klassen. “In particular, there are a lot of problems that are either orthogonal or really sequential problems to solve. What Vola Dynamics currently provides in our library is not an alternative to rough volatility. Those are really completely orthogonal problems that are trying to be addressed there. What we currently solve is the problem of how to describe the vanilla market via robust, parametric volatility surfaces (and, optionally, implied forward or borrow curves) in real-time, so that they can be used by all market participants from high-frequency prop shops to big banks or hedge funds. We also solve the problem of spot-vol dynamics, i.e. how vol surfaces move when the underlier moves. As vol dynamics has become more dynamic itself, so to say, last year, it has become even more important for the proper hedging of vanillas and exotics. ”

Vola’s commitment to building robust analytics and infrastructure means the vendor has grown considerably within its traditional market of banks, hedge funds, and prop shops, with new additions from the pension fund business and an increase of clients in Europe and Asia.

New players from the crypto field, have also become clients of Vola. “We have more and more crypto firms approaching us because crypto options are exploding.” Klassen continues, “The volume of crypto options traded has gone up by at least an order of magnitude in the last year. And we now have a lot of players that want to trade options and don’t have the basic analytic infrastructure to do so.”

“Rather than trying to figure this all out by themselves, they can come to us. Our infrastructure works for any kind of asset, as long as there are traded vanilla options (calls and puts, in other words).”

Where next then, for Vola?

“The problem that we’ve solved is the foundation of not just the vanilla and light exotic business, but basically any kind of derivatives business. However, if you are involved in the exotics or structured products business, then of course you will need some kind of more fundamental, ‘microscopic’ model, like members of the traditional ‘SLVJ’ (stochastic, local vol, jumps) family, or newer models involving rough volatility. Such models are much easier to calibrate if one has as input a sensible vol surface that extends to all strikes and perhaps beyond the listed maturities, rather than just vanilla prices for the listed set of strikes and terms.”

“For other products we’re working on – stay tuned!”

For further information on Vola Dynamics visit