Volatility of volatility spike drives options liquidity squeeze

Options market metrics suggest dealers have navigated volatility surge without serious pain - but the market did experience a brief liquidity squeeze

It is too early to give the industry a pat on the back, but equity derivatives traders feel they deserve it. Realised and implied volatility leapt in August without – they claim – triggering the kind of pain seen in May 2010, when a similar jump caught many banks out. This time, bid/offer spreads widened and liquidity decreased, but less violently than last year, dealers say.

“As intra-day volatility spiked, market-makers had to charge more to cover themselves against huge intra-day market moves