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E. Barthe: Do Retail Structured Products Distort Equity Volatilities?

January 15, 2025

I investigate how the hedging activity of structured products affects equity volatilities, contributing to the structured products literature and examining the influence of option supply/demand on volatility. When a new retail structured product is issued (autocallable, barrier reverse convertible, reverse convertible etc.), it creates a net supply of gamma. The rehedging activity of banks compresses the realised volatility of those underlyings. The volumes are large enough to have a significant impact on the volatility surfaces of the most popular underlyings. That phenomenon gives birth to profitable trading strategies in dispersion format.

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