Volatility Risk
Loss from realized moves, volatility repricing and model error.
#Risk mechanism
The short call carries negative convexity. Large moves can dominate premium, while a rise in implied volatility can increase the cost of closing the obligation before expiry.
#Stress conditions
- Earnings, macro releases or issuer events.
- Volatility regime shift.
- Gap through the strike.
- Model input or surface calibration error.
#Control principles
- Expose implied volatility, term and event context with each quote.
- Bound stale calibration and unsupported strikes.
- Stress jumps rather than relying only on diffusion models.
- Measure close cost and path-dependent mark-to-market.