My experience as a machine learning research intern: from social media data to an IEEE publication

Anirudh Kumar

In this article, Anirudh KUMAR (B.S. Economics, IIT Kanpur, with a minor in Artificial Intelligence and Machine Learning) shares his experience as a machine learning research intern. From February to August 2024, he worked under the supervision of Professor Swagato Chatterjee on a study of how people respond to Facebook communication about hydrogen fuel cell vehicles. The project later became a paper in IEEE Transactions on Engineering Management.

About the research project

The project examined a practical communication problem. When an organization posts about a sustainable technology, which parts of the message are associated with likes, comments, shares, and other interactions? We chose hydrogen fuel cell vehicles because the technology is promising but still unfamiliar to many people. Organizations therefore have to explain both its immediate uses and its longer-term potential.

A single subject can be framed in very different ways. A post about a hydrogen-powered bus might discuss lower tailpipe emissions, give technical details about fuel-cell efficiency, announce a government pilot project, or warn about the cost of delaying cleaner transport. The technology is the same, but the topic, readability, and emotional tone are different. Our job was to turn those differences into variables that we could test.

My internship

My missions

My mission was to help build a reproducible pipeline from raw Facebook posts to research findings. I worked on text cleaning, topic modelling, sentiment and emotion measures, model comparison, charts, and short research briefs. Each stage had to answer a specific question: what was measured, why was it measured that way, and could another researcher reproduce the result?

Figure 1. From Facebook posts to research findings
Research workflow from Facebook data to text features, models, and findings
Source: Author’s own work.

The research workflow in practice

Step 1: collecting and structuring the data

The study used Facebook posts collected through CrowdTangle from February 2022 to February 2024. The search combined “hydrogen fuel” with terms such as vehicle, car, transport, train, airplane, traffic, and truck. We kept English-language posts and used the country of the page administrators to divide the sample.

The final dataset contained 9,672 posts: 4,106 observations from developed countries and 5,566 from developing countries. The developed-country sample was led by the United States, the United Kingdom, and Australia. The developing-country sample included India, China, the Philippines, South Africa, Pakistan, Myanmar, and observations from 72 other countries.

Our outcome variable was the total number of interactions with a post. We also recorded factors that could affect engagement even before considering the words, including the page’s followers and likes at the time of posting and whether the post was a photo, video, status update, or another format.

Step 2: cleaning the text with NLTK and spaCy

NLTK and spaCy are Python libraries for natural language processing. I used them to split text into tokens, remove material that did not help the analysis, and reduce related word forms to a common lemma. For example, lemmatization can map vehicles to vehicle and emissions to emission. This prevents the model from treating simple grammatical variations as unrelated ideas.

A simplified preprocessing example

Illustrative post before cleaning: “Hydrogen-powered buses are not yet cost competitive, but they can reduce urban emissions.”

Illustrative tokens after cleaning: “hydrogen”, “power”, “bus”, “not”, “yet”, “cost”, “competitive”, “reduce”, “urban”, “emission”.

The word not is important. If a standard stop-word list removed it, the sentence could appear more positive than the writer intended. I therefore did not treat preprocessing as a one-click operation. I inspected examples after URL and punctuation removal, after tokenization, after stop-word filtering, after lemmatization, and after the final features had been created. This is what I meant by checking the data after every major transformation.

Consistency mattered too. The forms EV, electric vehicle, and electric vehicles can refer to the same idea. If they are left as separate terms without review, topic frequencies and model inputs can become harder to interpret.

Step 3: finding topics with Latent Dirichlet Allocation

Latent Dirichlet Allocation, or LDA, is a topic model. It searches for groups of words that often occur together and represents each post as a mixture of those groups. I compared specifications with different numbers of topics and used coherence scores as one diagnostic. The final choice also had to produce topics that a reader could distinguish and name.

For developed countries, the model identified 12 topics. Examples included “Battery Technology and Toxicity” with words such as battery, lithium, toxic, electricity, EV, and metal; “Electric Aircraft and Aviation” with aircraft, plane, aviation, and flight; and “Electric Cars and Sustainable Transportation” with vehicle, electric, car, and powered. These three short-term topics had the strongest positive relationships with engagement relative to the reference topic in the final Poisson model.

For developing countries, the model identified 11 topics. Examples included “Government Green Energy Projects”, “Electric Vehicles and Battery Technology”, and “Future Energy Technologies”. The mix was different from the developed-country sample: immediate transport projects mattered, but longer-term energy planning also attracted attention.

This step taught me the difference between an output and a finding. LDA will always return word groups. The researcher still has to check whether those groups are stable, distinct, and useful for answering the research question.

Step 4: measuring sentiment and emotion

I used TextBlob and NLTK WordNet for sentiment measures and NRCLex for emotion categories. Sentiment summarizes whether the language is more positive or negative. NRCLex adds categories such as anticipation, trust, joy, surprise, fear, anger, disgust, and sadness.

The distinction matters because two negative messages can invite different reactions. A post expressing sadness about slow adoption may encourage passive reading, while a post warning about an urgent climate or energy risk may evoke fear and prompt comments or shares. In the final models, fear had the strongest positive relationship among the negative emotions in both country groups. Among positive emotions, anticipation was important in developed countries and trust was important in developing countries.

Dictionary-based scores are constructed variables, not direct readings of a person’s feelings. Negation, technical language, and context can change a sentence’s meaning. I therefore checked sample classifications instead of assuming that every automated label was correct.

Step 5: measuring readability

The study measured text complexity with the Gunning Fog Index. The index combines average sentence length with the share of complex words, usually words with three or more syllables:

Fog Index = 0.4 x [(words / sentences) + 100 x (complex words / words)]

Consider three ways to introduce the same subject. “Hydrogen cars are good” is easy to read but says little. “Hydrogen fuel cells produce electricity without tailpipe carbon emissions, although storage and refuelling remain costly” gives the reader both an accessible explanation and useful detail. A paragraph filled with unexplained terms such as proton-exchange membranes, electrochemical conversion, and volumetric energy density may be accurate but difficult for a general audience.

The results showed an inverted U-shaped relationship between the Fog Index and interactions. Engagement rose as messages became more informative, then fell when the text became too complex. The precise turning point differed by context. In the developing-country analysis, the partial-dependence curve reached its maximum near a Fog score of 20.

Step 6: comparing explanatory and predictive models

We used Poisson regression to explain how readability, topics, and emotions were associated with the count of interactions. We then compared Random Forest, Support Vector Regression, XGBoost, and Poisson-based predictive models. The predictive exercise used both in-sample and out-of-sample root mean squared error, or RMSE. A lower out-of-sample RMSE means the model predicted unseen posts more accurately.

The comparison also showed why the training score cannot be the only criterion. In the developed-country sample, XGBoost achieved a low in-sample error but showed signs of overfitting. Random Forest provided a better balance. Its out-of-sample RMSE fell from 4,898 in the baseline model to 3,056 after topic information was added. Adding emotion variables changed the error to 3,171, so the larger feature set was not automatically better.

What the study found

Message complexity has a middle ground

Posts that were very simple could lack useful information, while highly technical posts could demand too much effort from a general reader. The highest engagement appeared between those extremes. For an organization, the practical lesson is to explain the technology clearly without removing the detail that makes the message informative.

Relevant topics differ across markets

In developed countries, short-term topics such as electric vehicles, battery technology, and aviation were more engaging than distant or futuristic themes. In developing countries, the pattern was mixed. Government green-energy projects and battery technology mattered, but future energy technologies also resonated. A single global content plan would miss these differences.

Trust and fear both matter

Trust can make a new technology feel credible, while fear can draw attention to the consequences of inaction. Neither result means that organizations should exaggerate. It means the emotional tone of a message is measurable and should be considered alongside the topic and readability.

Communicating the results

I converted the analysis into topic tables, model-comparison charts, feature-importance plots, and three short research briefs. One chart compared the out-of-sample RMSE of the four predictive approaches. Another summarized the 12 developed-country topics and the 11 developing-country topics. The briefs translated those outputs into communication questions: how technical should a post be, which topics fit each market, and which emotional signals require careful interpretation?

This work exposed weak explanations quickly. If I could not explain why Random Forest was preferred to XGBoost, or what a topic coefficient meant relative to the reference topic, the figure was not ready for another reader.

Required skills and knowledge

The internship required Python, natural language processing, regression, machine learning, and model evaluation. My economics courses helped me define variables and separate association from causation. My AI and machine-learning coursework helped me build the pipeline and compare models.

The work also required careful records. I kept track of cleaning rules, exclusions, topic specifications, model versions, and evaluation results. I treated the code as shared work. A co-author should be able to see what changed and why.

From internship to publication

The project developed into the article Drivers of Social Media Engagement on Organizational Communication on Sustainable Technological Innovation: Insights from Developed and Developing Countries, published in 2026 in IEEE Transactions on Engineering Management.

The manuscript went through several rounds of revision. I learned to treat a changed result as information rather than as a setback. If a coefficient, topic, or model ranking changed after a reasonable specification check, we needed to understand the reason before keeping the claim.

What I learned

The question comes before the model.

I now write the research question in plain language before opening a notebook. In this project, the question was not simply which algorithm predicts engagement best. We also needed to understand which message characteristics were associated with engagement and whether the relationships differed across country groups.

Small decisions need a record.

A stop-word choice can change the meaning of a sentence. A different number of LDA topics can change the labels used in the regression. Weeks later, those decisions are difficult to reconstruct from memory, so I keep a short log of exclusions, transformations, and model changes.

Prediction and explanation are different tasks.

Poisson regression helped us interpret relationships between the features and interaction counts. Random Forest was more useful for prediction. Neither result replaced the other. A strong research design needed both an interpretable explanation and an honest test on unseen data.

Financial concepts related to my internship

Investor attention

Attention is scarce in financial markets as well as on social media. Investors cannot read every earnings call, filing, news article, and management post. Topic and engagement analysis can help researchers study which firms or themes receive attention and whether that attention is associated with trading activity.

Sentiment and textual analysis

Earnings calls, annual reports, and management commentary contain language that can be measured systematically. The internship taught me to inspect how a sentiment variable was built before treating it as a signal. A financial sentence with negation or technical terminology can confuse the same dictionary methods used for social-media text.

Model risk

The XGBoost result offered a direct example of model risk. A model can fit the training data closely and perform poorly on new observations. Out-of-sample tests, sensitivity checks, and readable documentation are essential when a model may influence an investment or business decision.

How I use these lessons now

In my current work as an AI Growth Intern at Pocket FM, I apply the same method to a different problem: a GenAI workflow that converts Hindi audio scripts into Marathi. I work with editors to define quality criteria for emotional beats, narrative hooks, and regional expressions. A fluent translation is not enough if it changes the scene’s intent.

The research internship taught me to make those criteria explicit, inspect intermediate outputs, and document recurring errors. The tools have changed, but the habit of testing each transformation remains useful.

Why should I be interested in this post?

A published paper can make research look linear. My experience was less tidy. A cleaning rule affected the topics, the topics affected the models, and the models sometimes sent us back to an earlier decision. The practical work was in those links.

For students interested in finance, data science, or AI, the project shows how researchers can turn raw language into evidence. Technical skill is necessary, but the result is easier to trust when the examples, assumptions, and out-of-sample performance are visible.

Related posts on the SimTrade blog

Looking for an internship or a research experience? You may find useful information in other posts where contributors describe their professional work:

   ▶ All posts about Professional experiences

   ▶ Haiyuan XU My professional experience as a financial research assistant in a green finance institute

   ▶ Anant JAIN My internship experience at Deloitte

Useful resources

Chatterjee, S., Ghatak, A., Meena, A. K. and Meena, P. (2026). Drivers of Social Media Engagement on Organizational Communication on Sustainable Technological Innovation: Insights from Developed and Developing Countries. IEEE Transactions on Engineering Management, 73. DOI: 10.1109/TEM.2026.3665711.

Blei, D. M., Ng, A. Y. and Jordan, M. I. (2003). Latent Dirichlet Allocation. Journal of Machine Learning Research, 3, 993-1022.

NLTK Project. Natural Language Toolkit documentation.

Explosion. spaCy usage documentation.

About the author

The article was written in July 2026 by Anirudh KUMAR, who completed a B.S. in Economics at IIT Kanpur with a minor in Artificial Intelligence and Machine Learning. He is an AI Growth Intern at Pocket FM and previously worked in product management at AryaVastra and machine-learning research under Professor Swagato Chatterjee. His interests include behavioral finance, empirical research, and AI applications in business.

   ▶ Discover all articles by Anirudh KUMAR.

Trading as Principal in Illiquid Markets: What No Finance Course Can Fully Prepare You For

Isaac Fainstein

In this article, Isaac FAINSTEIN, Director at Petrini Valores and Visiting Lecturer at IESEG School of Management (Lille), shares his professional experience as a trader in illiquid fixed income and emerging markets — and what practitioners know that most finance courses never cover.

About Petrini Valores

Petrini Valores is an Argentine broker-dealer specializing in fixed income, equities, derivatives, and financing. The firm operates as a market maker in illiquid corporate and provincial bonds, across multiple asset classes: peso-denominated, USD-denominated, inflation-linked, and dollar-linked instruments. It also participates as a member of underwriting syndicates in primary bond issuances.

As Director of the trading desk, I am responsible for pricing, execution, and risk management across these asset classes on a daily basis.

Logo of Petrini Valores.
Logo of Petrini Valores
Source: Petrini Valores.

Trading in practice: what the desk actually looks like

I have been trading fixed income and foreign exchange in Argentine markets for over fifteen years. Over that same period, I have taught applied finance courses at IESEG School of Management in Lille — courses built around the situations I encounter at the desk every week. What follows is an attempt to bridge those two worlds.

Agency, intermediation, and principal trading: three different jobs

Most finance programs teach students how to price securities. Fewer teach them what it actually feels like to put the firm’s capital at risk to make a market. The distinction between agency trading, intermediation, and principal trading is more consequential than most courses suggest.

In agency trading, you act on behalf of a client — executing their order in the market, taking no position yourself, earning a fee for the service. The client bears the market risk. You are their agent.

Intermediation — what practitioners often call riskless principal — is already a form of proprietary trading, technically speaking. You act as principal on both legs: you buy from one counterparty and simultaneously sell to another, earning the bid-ask spread. Because both legs close at the same time, your market exposure is minimal. You are not an agent of either side. You are a counterparty to both, just briefly, and without meaningful inventory risk.

Principal trading with inventory risk is something else entirely. The firm puts its own capital on the line with no guaranteed exit. You buy a bond from a client with no buyer lined up on the other side. You sell from your own inventory because a client needs to buy. You absorb the spread — and the full market risk that comes with holding the position until you can unwind it. The longer you hold, the more exposure you carry. This is the mode that no simulation fully replicates, and the one this article is about.

Pricing illiquid bonds: when there is no obvious answer

A large portion of my daily activity involves corporate and provincial bonds that do not trade on a liquid exchange. There is no visible order book. There is no Bloomberg mid-price that everyone agrees on. There is a fragmented OTC market where each dealer forms their own view of value.

When a client calls and asks for a bid or offer on one of these bonds, I have to produce a price — quickly, without full information. I know what I think the bond is worth. What I do not know is whether the client is a buyer or a seller.

This asymmetry is at the heart of market-making in illiquid securities. If I quote too tight a spread, I may find myself on the wrong side of a pre-arranged trade. A client may call five dealers simultaneously, collect our offers, and hit the best one — while already having a buyer on the other side paying more than my offer. In that case, I have sold bonds below what the market was willing to pay, and the client has effectively traded through me.

I use this scenario in class regularly. Students are always surprised. They assume that being a good trader means knowing what something is worth. It does — but it also means understanding the information game you are playing with the person on the other side of the phone.

Then there is the moment that every trader knows: you have priced the trade, the client has everything they need to decide, and then — nothing. They go to lunch. They are in a meeting. They are closing another trade. You are sitting there holding a price in a moving market, watching the bid shift while you wait for a response that may or may not come. No simulation I have seen fully replicates the specific discomfort of that moment.

Primary market underwriting: when commitment meets reality

Beyond secondary market activity, I participate as an underwriter in primary bond issuances for Argentine corporates, as part of the underwriting syndicate organized around each deal. This is a different kind of principal risk — one that is taken on before the bond even exists.

When a company decides to issue a bond, I commit to underwriting a portion of the deal. This is a real financial commitment: if investor demand is insufficient to cover the full issuance, I absorb the remainder onto my own book. In Argentina, primary markets typically use a Dutch auction format — investors submit bids specifying the coupon rate they are willing to accept and the quantity they want. The issuer then sets a clearing rate that satisfies the target issuance amount.

On auction day, I am simultaneously placing bonds with my own client base, managing my underwriting exposure, and monitoring where the clearing rate is likely to land. If I have covered my commitment with investor demand, I am in good shape. If not, the unsold portion of my underwriting commitment ends up on my balance sheet at the clearing rate — and I work that position off over the following days or weeks, offering it into a market that may or may not be ready to absorb it.

This is textbook principal risk. It is also something that very few students have any mental model for before entering the industry.

FX mismatches and capital controls: the Argentine laboratory

Argentina has operated with capital controls for years. At their peak, the gap between the official exchange rate and the blue-chip swap rate — a market-implied rate derived from the implicit FX embedded in cross-market bond transactions — reached several hundred percent. Today the gap has narrowed significantly, but the structure remains.

This creates situations that no standard finance course addresses. A bond denominated in dollars can be bought and sold in different currencies. If I buy a USD bond paying dollars and sell it against pesos, I receive pesos for an asset I paid for in dollars. I now have a currency mismatch on my book: I am effectively long pesos, short dollars. I can hedge that exposure immediately by buying back the dollars in the FX market, or — if I have a view that the implied exchange rate will move in my favor — I can hold the position and let it run.

The decision is not mechanical. It depends on my reading of the regulatory environment, the direction of the blue-chip swap rate, and how much currency risk I am willing to carry on the book at that moment. This is daily life on the desk. And it is very difficult to teach without the context that produces it.

When models break: the lesson of negative oil prices

In April 2020, front-month WTI crude oil futures briefly traded at negative prices. Physical storage constraints had overwhelmed the market’s mechanics, and sellers were willing to pay counterparties to take delivery of crude oil they had nowhere to store.

I watched it happen from the desk in real time. What struck me was not the price itself — it was the reaction across the industry. Many traders assumed it was a glitch. Some platforms were simply not built to display or process negative prices, and brokers whose systems could not show the quotes found themselves liable to clients who could not see — let alone act on — what was happening in the market. Several firms had to absorb losses because their technology had never contemplated the possibility.

I use this episode as an opening in class — not to explain futures mechanics, which students can read in any textbook — but to ask a different question: what do you do when the model produces an answer that the real world seems to reject? What is your decision framework when your screen shows something that looks impossible? The answer is that you need to understand the why behind the price before you can act on it. That understanding is not something you can look up in real time. Either you have built it, or you have not.

The most important rule on a trading desk

Every trader makes mistakes. A wrong-way position, a misread signal, a fat-finger entry. What separates good trading culture from bad is not the absence of errors — it is what happens in the first thirty seconds after one occurs.

The worst thing a trader can do is wait. Hiding a mistake, even briefly, turns a manageable problem into a serious one. A position that could have been closed at a small loss will compound. The bid-ask spread you avoided paying once will have widened by the time you are forced to act.

The most important rule on any trading desk is this: when you make a mistake, communicate it immediately. No fear of consequences should outweigh the cost of silence. A well-run desk creates an environment where immediate transparency is rewarded — because the alternative is invariably more expensive. This is not a financial concept. It is a cultural one. And it may be the most practically useful thing I can tell any student before they sit down at a real trading desk for the first time.

Argentina: the best trading school you never attended

With a World Cup recently concluded — and Argentina’s performance still fresh in everyone’s memory — there is a useful analogy worth making. Argentina’s best players did not all come through polished academies with perfect pitches and controlled conditions. Many learned on uneven surfaces, in chaotic environments, where improvisation and resilience were not optional. Those conditions, more often than not, produced technically complete and mentally durable players.

The same logic applies to trading in an environment like Argentina. Multiple asset classes, multiple yield curves, structural illiquidity, capital controls, and macroeconomic volatility — all simultaneously, all the time. Traders who come through this market and move to larger ones — Brazil, Mexico, or developed markets — typically find the transition smoother than expected. They have already navigated conditions that most traders in more liquid markets never face. When you learn to trade in the mud, the rest feels like solid ground.

Financial concepts related to this article

I present below four financial concepts central to my daily work as a trader in illiquid and emerging markets.

Principal trading and inventory risk

In principal trading, the broker-dealer buys or sells securities using its own capital, taking market risk onto its own balance sheet. This contrasts with agency trading, where the firm executes on behalf of a client and earns a fee, or with intermediation (riskless principal), where the firm matches both sides simultaneously and earns the bid-ask spread without holding inventory risk. The critical difference is time: in principal trading, the firm holds a position that may not be unwound immediately, and the longer it is held, the greater the market exposure.

Underwriting syndicate and book runner

In a primary bond issuance, several broker-dealers form an underwriting syndicate, each committing to place a portion of the deal with investors. The book runner is the lead of this syndicate — it manages the investor order book, coordinates pricing with the issuer, and oversees the allocation process. Other syndicate members, such as Petrini Valores in many Argentine corporate issuances, commit to their own underwriting tranche and are responsible for placing it with their client base. If a syndicate member cannot fully place its portion, the unsold bonds remain on its balance sheet at the clearing rate.

Dutch auction in primary bond markets

A Dutch auction is a price-discovery mechanism in which investors submit bids specifying both quantity and the coupon rate they are willing to accept. The issuer sets a single clearing rate that satisfies the target issuance amount. All successful bidders receive bonds at the clearing rate, regardless of their individual bids. This format is widely used in Argentine primary markets for corporate bond issuances.

Blue-chip swap rate and capital controls

In markets with capital controls, such as Argentina, the blue-chip swap rate (also known as the contado con liquidación or CCL rate) is an implied exchange rate embedded in cross-market bond transactions. It reflects the market’s assessment of currency value in the absence of free convertibility and can diverge significantly from the official rate. Managing positions across currencies in this environment requires an understanding of the regulatory framework and a constant read on the gap between official and market-implied rates.

Why should I be interested in this post?

If you are a finance student planning to work in sales and trading, fixed income, or any market-facing role, the situations described here are among the ones you will encounter earliest — and none of them are fully captured in a simulation or a pricing model.

The gap between finance education and market reality is not about knowledge. Most graduates know their bond math. The gap is about judgment: knowing how to act when information is incomplete, the counterparty is not responding, and the market is moving. Understanding how principal risk, illiquidity, and currency mismatches interact in real time is the difference between arriving prepared and arriving surprised.

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Useful resources

Academic research

Gkillas K. and Longin, F. (2018) Financial market activity under capital controls: lessons from extreme events, Economics Letters, 171, 10-13.

Martellini, L., Priaulet, P., Priaulet, S. (2003) Fixed-Income Securities: Valuation, Risk Management and Portfolio Strategies, John Wiley & Sons.

Hull, J. C. (2021) Options, Futures, and Other Derivatives, 11th edition, Pearson.

Business resources

Petrini Valores — Argentine broker-dealer specializing in fixed income, equities, derivatives, and financing.

FINRA Tools and Calculators — public source for US bond transaction data and pricing context.

About the author

This article was written in July 2026 by Isaac FAINSTEIN, Director at Petrini Valores and Visiting Lecturer at IESEG School of Management (Lille), where he has taught applied finance and trading courses for over 10 years.

   ▶ Discover all articles by Isaac FAINSTEIN.

Delta Hedging Explained: How Traders Stay Market Neutral

Abel ARAYA

In this article, Abel ARAYA (ESSEC Business School, Master in Finance, 2025) takes a detailed and practical look at delta hedging, a core concept in options trading. Far from being just a mathematical tool, delta hedging is a real-world technique that allows traders to manage market risk dynamically and stay focused on what they actually want to trade: volatility and relative value.

Understanding the challenge of options trading

When a trader buys or sells options, they are taking a view not only on the direction of the market but also on how much the market might move. The value of an option changes constantly, influenced by multiple factors such as the price of the underlying asset, time decay, volatility, and interest rates. Without active management, these continuous changes can make an options book risky and unpredictable.

Delta hedging addresses this by adjusting the position in the underlying asset to neutralize the impact of small price movements. The trader aims for a portfolio that reacts as little as possible to minor changes in the underlying price so that risk is concentrated on the variables they intend to trade, such as volatility.

What exactly is delta?

Delta is one of the key Greeks that measure how the price of an option responds to changes in market variables. It tracks the sensitivity of the option value to the underlying price.

Δ = ∂V / ∂S

Here, V is the option value and S is the price of the underlying asset. For example, if a call option has a delta of 0.60, a rise of 1 euro in the underlying increases the option value by about 0.60 euro. A delta close to 1 behaves like the underlying, while a delta near 0 barely reacts to price moves.

The principle of delta neutrality

Suppose a trader has sold call options on a stock. If the stock rises, the calls gain value and the short position loses money. To offset this exposure, the trader buys shares of the underlying. The goal is to hold a number of shares that compensates the option’s delta so that small moves in the stock price do not change the portfolio value.

Δportfolio = Δoption + Δhedge = 0

The trader dynamically buys or sells the underlying to keep the combined delta close to zero.

The dynamic nature of delta

Delta changes as markets evolve, time passes, or volatility shifts. The speed of this change is captured by gamma, which measures the curvature of the option value with respect to the underlying price.

Γ = ∂²V / ∂S²

A high gamma means delta changes quickly, which forces more frequent rebalancing. Large options books can require several adjustments per day during volatile periods. In episodes of market stress, hedging flows can increase significantly as deltas move rapidly.

Hedging a single option versus a book of options

So far we have described delta hedging for a single option, but a trader on a derivatives desk rarely manages one position in isolation. In practice, the desk holds a book of hundreds or thousands of options across many underlyings, strikes and maturities. Hedging each one separately would be inefficient and very costly in transaction fees.

Instead, the trader looks at the net risk of the entire book. All the individual deltas are aggregated into a single net delta for the portfolio, and only that net exposure is hedged in the underlying. Long and short positions offset each other, so the desk usually needs far fewer hedging trades than the number of options it holds. The same logic applies to the other Greeks: the book is managed at the level of its net delta, gamma and vega rather than option by option. This portfolio approach is what makes running a large options book possible, and it is one of the core skills of a derivatives trader.

Re-hedging and trading costs

Each rebalancing operation generates transaction costs, including bid-ask spreads and slippage. Skilled traders balance precision and efficiency, deciding when to rebalance and when to tolerate a small residual exposure. Frequent re-hedging reduces risk but can erode profits through costs. The optimal approach depends on liquidity, volatility, and position size.

Why delta hedging matters

Delta hedging allows traders to isolate the risks they want to trade. By neutralizing directional exposure, they can focus on volatility, time decay or interest rate sensitivity. For instance, a volatility trader may be long options but delta-hedged, seeking to profit if realized volatility exceeds implied volatility rather than from market direction.

Securing the bank’s margin

For a bank acting as a market-maker, delta hedging is not only a risk-management tool: it is also what allows the desk to secure its margin. When the bank sells an option to a client, it charges a price that is slightly above the option’s theoretical, or fair, value given by its pricing models. That difference between the price paid by the client and the theoretical value is the bank’s margin.

By delta hedging the position dynamically, the bank replicates the payoff of the option at a cost close to its theoretical value while neutralizing the impact of market direction. If the hedging is done well, the bank is no longer betting on whether the underlying goes up or down: it has locked in that initial margin regardless of how the market moves. In other words, delta hedging turns a directional exposure into a controlled activity whose objective is to capture and protect the spread between the price sold to the client and the theoretical value of the option.

A practical example

Consider a trader who sells 5 million euros of call options on the EuroStoxx 50 with an average delta of 0.4. To stay neutral, the trader buys 2 million euros of EuroStoxx 50 futures, which offsets the option delta. If the index rises and delta increases, the trader buys more futures. If it falls, they reduce the hedge. The objective is to end the day with minimal unhedged exposure despite continuous fluctuations.

Although the mechanics look simple, judgment matters. On quiet days, fewer adjustments are needed. In unsettled markets, hedging becomes more frequent. Delta hedging therefore blends quantitative discipline with trader intuition.

Common misconceptions

Delta hedging does not eliminate all risk. It removes first-order sensitivity to small price moves. Sudden jumps in price or volatility introduce residual risks captured by higher-order Greeks such as gamma and vega. Effective options risk management considers these dimensions together.

Conclusion

Delta hedging is a practical cornerstone of modern options trading. By continuously adjusting exposure, traders can focus on pricing, volatility and liquidity rather than guessing direction. Understanding delta hedging provides a clearer view of market neutrality in practice.

Why should I be interested in this post?

If you are a student in finance interested in derivatives, trading, or risk management, delta hedging is one of the most fundamental concepts you will encounter in practice. It bridges the gap between option pricing theory and what traders actually do every day on the floor. Understanding delta hedging will give you a concrete language for discussing risk with traders and structurers in interviews, and it directly underpins roles in equity derivatives, rates options, and exotic products desks.

More broadly, the logic of delta hedging, isolating a risk you want to trade from one you do not, applies far beyond options. It is central to how banks and hedge funds manage their books across all asset classes. Whether you are targeting a front-office internship, a quant role, or a risk management position, mastering this concept will give you a genuine edge.

Related posts on the SimTrade blog

   ▶ Jayati WALIA Black-Scholes-Merton option pricing model

   ▶ Akshit GUPTA Option Greeks: Delta

   ▶ Akshit GUPTA Option Greeks: Gamma

   ▶ Akshit GUPTA Option Greeks: Vega

   ▶ Jayati WALIA Implied Volatility

   ▶ Saral BINDAL Implied Volatility and Option Prices

Useful resources

Hull J.C. (2022) Options, Futures, and Other Derivatives, Pearson, 11th Edition.

Black F. and Scholes M. (1973) The Pricing of Options and Corporate Liabilities”, Journal of Political Economy, 81(3), 637-654.

Merton R.C. (1973) Theory of Rational Option Pricing Bell Journal of Economics, 4, 141–183.

Bank for International Settlements — OTC Derivatives Statistics

About the author

The article was written in July 2026 by Abel ARAYA (ESSEC Business School, Master in Finance, 2025).

   ▶ Discover all articles by Abel ARAYA

Inside the Markets COO Office at HSBC: Understanding How Trading Floors Are Managed

Abel ARAYA

In this article, Abel ARAYA (ESSEC Business School, Master in Finance, 2025) offers an inside look at the Markets COO Office at HSBC Continental Europe. Through his one-year apprenticeship, he shares how this central function coordinates trading activities, manages budgets and risks, and ensures that the Markets division operates with efficiency and strategic discipline.

About the company

HSBC was founded in 1865 as the Hongkong and Shanghai Banking Corporation to finance trade between Europe and Asia, and has since grown into one of the world’s leading financial institutions. Headquartered in London and listed in London, Hong Kong, New York, Paris and Bermuda, it held around 3.2 trillion US dollars in assets at the end of 2025, employed roughly 211,000 people across some 56 countries and territories, and served more than 40 million customers.

On the wholesale side, its corporate and institutional clients are covered by the Corporate and Institutional Banking (CIB) division, which generated around 27.6 billion US dollars in revenue in 2025. Within CIB, the Markets and Securities Services teams provide liquidity, financing and risk-management solutions across fixed income, credit, FX, equities and securities services to large corporates, financial institutions, asset managers, hedge funds and governments. In this business HSBC competes with the other major global markets houses, such as JPMorgan, Citi, Bank of America and Goldman Sachs in the United States, and Deutsche Bank, Barclays, BNP Paribas and Société Générale in Europe, differentiating itself through its international network and its historical strength in Asia.

I worked at HSBC Continental Europe, the group’s Paris-headquartered subsidiary covering continental Europe. Since the sale of its French retail banking business on 1 January 2024, it has refocused on corporate and institutional clients, with a consolidated balance sheet of 251 billion euros in total assets at the end of 2025.

Logo of HSBC.
Logo of HSBC
Source: the company.

During my apprenticeship, the Markets division was in the process of being integrated into the broader Corporate and Institutional Banking (CIB) structure. This reorganization involved significant changes to how the division was managed, reported, and resourced, which made my experience at the COO Office particularly rich in terms of exposure to strategic and operational transformation.

My internship

My missions

As a Business Manager Assistant within the Markets COO team, my work covered a wide range of financial and operational responsibilities. I contributed to the production of internal reports and presentations for senior management, summarizing the performance, expenses, and headcount of the Markets division. These documents were used in management meetings, financial steering committees, and due diligence reviews conducted during the restructuring process.

I was closely involved in cost forecasting and budget follow-up, helping the team anticipate upcoming expenses and identify deviations from plan. One of my key projects was the annual broker review, which required consolidating trading flow data across all asset classes to assess the efficiency, transparency, and compliance of relationships with external counterparties. This involved close coordination with traders, operations, and compliance teams across Paris, Germany, and India.

I also supported the preparation of headcount reports and organizational charts used by senior management to steer the restructuring of the division. These deliverables required precision and a thorough understanding of how each desk contributed to the overall structure of the Markets business.

Required skills and knowledge

This role required a combination of analytical and interpersonal skills. On the technical side, strong proficiency in Excel was essential for building budget models, consolidating large datasets, and producing financial summaries. Familiarity with the structure of a markets division, including the roles of front office, operations, compliance, and finance, was also important to contextualize the data I was working with.

Soft skills mattered just as much. Coordinating with stakeholders across multiple countries and hierarchies required clear written and oral communication, the ability to manage competing priorities, and a high level of attention to detail. The pace of the environment also demanded adaptability: priorities shifted quickly, and producing reliable output under time pressure was a daily reality.

What I learned

This experience gave me a deep understanding of how financial institutions manage their operations behind the scenes. I learned how budgets are built, how costs are tracked and challenged, and how strategic decisions made at senior level translate into concrete actions on the trading floor. I also developed a much clearer picture of how risk is monitored and how compliance frameworks shape the day-to-day behaviour of a markets division.

Working across teams in Paris, Frankfurt, and India gave me direct exposure to how global coordination works in practice. I learned the importance of data quality and rigour: a single inconsistency in a report could lead to misunderstandings or delayed decisions at the highest level. This reinforced my attention to detail and my commitment to producing work that is both accurate and clearly communicated.

Financial concepts related to my internship

I present below three financial concepts related to my internship: cost and budget management, change management, and due diligence.

Cost and Budget Management

Cost and budget management refers to the process by which an organization plans, monitors, and controls its financial resources to ensure that spending remains aligned with strategic objectives. In a markets division, this involves tracking a wide range of costs: staff compensation, technology infrastructure, external service providers, and regulatory compliance expenses. The budget is typically set at the beginning of the year based on business forecasts and strategic priorities, and then monitored on a monthly basis against actual expenditure.

In my role at the Markets COO team, cost and budget management was one of my primary responsibilities. I contributed to the monthly budget follow-up by consolidating cost data from different desks and entities, identifying variances between forecasts and actual figures, and preparing summary reports for senior management. When a desk was running significantly above or below budget, the COO team would investigate the drivers and, if necessary, escalate to management for a decision. I learned that in a large institution like HSBC, even small deviations in cost forecasts can have a significant impact on the division’s overall financial performance, particularly during a period of restructuring where cost targets were closely scrutinized.

Change Management

Change management is the structured approach through which an organization transitions from its current state to a desired future state while minimizing disruption to operations and people. In the context of financial institutions, it often involves reorganizations, mergers of business lines, technology migrations, or regulatory-driven transformations. Effective change management requires clear communication, stakeholder alignment, and careful sequencing of decisions to ensure continuity of service during the transition.

During my apprenticeship, HSBC’s Markets division was undergoing a major strategic restructuring: the Markets and Securities Services unit was being integrated into the broader Corporate and Institutional Banking (CIB) structure. This was not a minor adjustment, but a fundamental reorganization of how the division was governed, resourced, and reported. I observed the effects of this transformation directly through my work: headcount reports were being revised regularly, cost allocation frameworks were changing, and the responsibilities of the COO team were evolving to reflect the new organizational model. I worked closely with the COO based in Germany, who was managing part of this transition, and I saw first-hand how much coordination and precision are required to keep a large division functioning smoothly while simultaneously reshaping it. Change management, in that context, was not an abstract concept: it was a daily operational reality.

Due Diligence

Due diligence refers to the comprehensive process of investigating and verifying information before making a significant business decision. In investment banking and financial services, it is most associated with mergers and acquisitions, where a buyer conducts a thorough review of the target company’s finances, legal situation, and operations. However, the concept applies equally to other contexts, including the assessment of external service providers, the validation of financial data before it is presented to management, and the review of counterparty relationships.

In my role, due diligence took the form of the annual broker review process. This involved systematically reviewing the trading flows directed to each external broker, verifying the accuracy of the data, and assessing whether the allocation of business to each counterparty was justified by objective performance criteria. The process required gathering data from multiple sources, reconciling inconsistencies, and presenting findings to senior management with clear supporting evidence. I also contributed to due diligence exercises conducted during the restructuring process, where the COO team was asked to validate headcount and cost data before it was presented to the executive committee. These experiences taught me that rigorous due diligence is not just about finding problems: it is about building the trust and confidence that allow organizations to make well-informed decisions.

Why should I be interested in this post?

If you are a student in business and finance considering a career in financial markets, this post offers a perspective that is rarely covered in mainstream discussions about finance careers: the operational and strategic backbone of a trading floor. Most students aspire to front-office roles in trading or sales, and rightly so. But understanding how a markets division is actually run, how its costs are managed, how its risks are monitored, and how major transformations are navigated, is an invaluable foundation for any finance career.

A role in a Markets COO or Business Management team is particularly well-suited for students who want to develop a transversal understanding of markets while building strong analytical and organizational skills. It is also increasingly recognized as a credible path toward front-office positions: many senior traders and sales managers have spent time in COO or control functions early in their careers, and this experience gives them a level of business awareness that pure front-office profiles often lack. Whether you are targeting trading, sales, risk, or corporate finance, the skills and perspective gained in this type of role will give you a genuine advantage.

Related posts on the SimTrade blog

   ▶ Tanguy TONEL My experience as a trading floor intern at CIC Market Solutions

   ▶ David GONZALEZ Discovering the Secrets of a Bank Trading Room

   ▶ Louis DETALLE A quick review of an Analyst in Transaction Services’ job

   ▶ Mickael RUFFIN My Internship Experience as a Structured Finance Analyst at Société Générale

Useful resources

HSBC — Corporate and Institutional Banking

ESMA — MiFID II and MiFIR

Basel Committee on Banking Supervision — Sound Practices for Operational Risk Management

About the author

The article was written in July 2026 by Abel ARAYA (ESSEC Business School, Master in Finance, 2025).

   ▶ Discover all articles by Abel ARAYA

What I Learned on a Trading Floor at HSBC: Understanding Markets from the Inside

Abel ARAYA

In this article, Abel ARAYA (ESSEC Business School, Master in Finance, 2025) shares his experience on HSBC’s trading floor in Paris. He explains how this opportunity helped him understand how a global markets division operates, how teams interact, and what makes the environment of a trading floor so unique.

From private banking to markets

Before joining HSBC, I was working in private banking at Milleis Banque Privée. It was a good introduction to finance, but I wanted to understand how the markets worked behind the scenes. Joining HSBC Continental Europe as a Business Manager Assistant within the Markets COO (Chief Operating Officer) team gave me the chance to discover that world for the first time. The COO function within a markets division is responsible for the operational and financial oversight of the trading floor: it sits at the intersection of strategy, finance, and day-to-day management, supporting the front office without being directly involved in trading itself.

About the company

HSBC was founded in 1865 as the Hongkong and Shanghai Banking Corporation, created to finance trade between Europe and Asia. More than a century and a half later, it has become one of the largest banking and financial services groups in the world. Headquartered in London and listed in London, Hong Kong, New York, Paris and Bermuda, the group held around 3.2 trillion US dollars in assets at the end of 2025, employed roughly 211,000 people across some 56 countries and territories, and served more than 40 million customers.

On the wholesale side, where I worked, HSBC brings together its corporate and institutional clients under the Corporate and Institutional Banking (CIB) division, which generated around 27.6 billion US dollars in revenue in 2025. CIB was created on 1 January 2025 by combining the former Global Banking and Markets business with commercial banking activities outside the UK and Hong Kong, with the ambition of ranking among the top three global wholesale banks. Within CIB, the Markets and Securities Services teams provide liquidity, financing and risk-management solutions across fixed income, credit, foreign exchange, equities and securities services.

Its clients are large corporates, financial institutions, asset managers, hedge funds and governments that rely on the bank to trade, hedge and finance their activities across the world. In this space HSBC competes with the other large global markets houses, such as JPMorgan, Citi, Bank of America and Goldman Sachs in the United States, and Deutsche Bank, Barclays, BNP Paribas and Société Générale in Europe. Its main differentiator remains its international network and its historical strength across Asia and emerging markets.

My apprenticeship took place at HSBC Continental Europe, the group’s Paris-headquartered subsidiary covering continental Europe. Since the sale of its French retail banking business on 1 January 2024, HSBC Continental Europe has refocused on corporate and institutional clients, with a consolidated balance sheet of 251 billion euros in total assets at the end of 2025.

During my apprenticeship, this reorganization was still under way, which made it a particularly interesting time to observe how such a large organization adapts its structure while continuing to run its business day to day.

Logo of HSBC.
Logo of HSBC
Source: the company.

My apprenticeship

Within the Markets COO team, my work focused on the financial and organizational aspects of the trading floor. I contributed to budget monitoring, forecasts of upcoming expenses, and internal reports related to costs and resources. I was involved in the broker review process and in the preparation of financial summaries presented to management.

This position gave me a transversal view of the Markets division and helped me understand how each team contributes to the overall structure. I interacted with many different stakeholders: the COO in Germany, who was managing a restructuring process, teams in India working on operational data, and senior managers in Paris overseeing the desks. These collaborations taught me how coordination and communication are essential to keep such a large platform running efficiently.

Life on the trading floor

Working so close to the trading floor was one of the most rewarding parts of my experience. Even though my role was on the management side, I was constantly in contact with the desks. I often visited traders, salespeople, and structurers to better understand their activities and the financial implications of their operations. One moment that stayed with me was a conversation with a rates trader during a period of elevated volatility in the European bond market. He explained how the sudden widening of spreads between Italian BTPs and German Bunds was forcing him to adjust his hedging positions in real time, something I had only ever read about in textbooks. These interactions helped me connect the numbers I was analysing to the real market dynamics they represented.

The atmosphere on the floor was intense and collaborative at the same time. Information flowed constantly between desks, from rates to credit to repo, and decisions were made quickly. Observing this rhythm every day helped me understand how interconnected market teams are, and how much relies on clear communication and mutual trust.

What I learned

This experience gave me a real understanding of how a trading floor operates, both economically and humanly. I learned how a large institution like HSBC manages its costs, allocates resources, and balances strategic priorities with budget realities. I also saw how economic pressures, regulatory changes, and internal dynamics influence decisions at every level of the organization.

Spending time close to the Fixed Income desks gave me a concrete sense of how sales, traders, and support teams work together. I realized that beyond products and numbers, markets are built on relationships, coordination, and constant adaptation.

Most importantly, this experience taught me the value of curiosity and initiative. By going to speak directly with teams, asking questions, and trying to understand their world, I gained insights that no spreadsheet could have given me. It made me appreciate both the complexity and the humanity of financial markets.

This one-year apprenticeship was a very strong first step into the world of markets. It helped me confirm that the natural next step for me would be a front-office internship as a Sales in Fixed Income, where I could build on what I learned and continue to grow within a trading environment.

Financial concepts related to my professional experience at HSBC

I present below three financial concepts related to my internship: market liquidity, collusion risk, and profit and loss (P&L).

Market Liquidity

Market liquidity refers to the ease with which a financial instrument can be bought or sold in the market without significantly moving its price. A liquid market has many buyers and sellers, tight bid-ask spreads, and the ability to execute large transactions quickly. An illiquid market, by contrast, forces participants to accept worse prices or wait, which can turn a theoretically profitable position into a loss once execution costs are taken into account.

In fixed income markets, liquidity is not uniform: it varies by product, by maturity, and by the time of day. Sovereign bonds such as French OATs or German Bunds are among the most liquid instruments in the world, with spreads of just a few basis points. Corporate bonds, by contrast, trade far less frequently and can see spreads widen dramatically in periods of stress. Structured products and exotic rates instruments can be even harder to unwind quickly.

One of the things I discovered at HSBC is the central role brokers play in providing liquidity. Not all brokers are equal: some are specialists on particular products or market segments. For example, inter-dealer brokers such as TP ICAP or Tradition are well known for their activity in rates and repo markets, where they connect banks anonymously to facilitate large transactions. During the annual broker review process that I participated in, traders would assess which brokers had provided the best liquidity, the most reliable pricing, and the fastest execution across different products. This review directly influenced how trading flows were allocated across brokers the following year. It made me understand that liquidity is not just a market property: it is also a relationship, built and maintained between institutions over time.

Collusion Risk

In financial markets, collusion risk between traders and brokers refers to a specific form of conflict of interest: a trader systematically routing a disproportionate volume of transactions to a particular broker, not because that broker offers the best execution, but because of a personal relationship, reciprocal favours, or informal arrangements. This behaviour is harmful to clients, who are entitled under regulation to receive the best available price and execution, a principle known as best execution, enshrined in the MiFID II directive in Europe.

The risk is subtle and not always easy to detect. A trader may genuinely believe that their preferred broker is the best, when in reality they are simply more comfortable with them. Over time, this can result in a concentration of flows toward one or two brokers that is not justified by objective performance criteria such as pricing quality, speed of execution, or market access. In the worst cases, the relationship can involve gifts, entertainment, or the sharing of confidential information, all of which are strictly regulated.

This is exactly what the annual broker review process at HSBC was designed to monitor and prevent. As part of my role in the Markets COO team, I contributed to this review, which involved analysing the distribution of trading flows across brokers and comparing it against objective performance metrics. If a trader was sending a significantly higher share of their volume to one broker without a clear justification, that anomaly would be flagged and discussed. The process ensured that broker relationships remained grounded in performance rather than personal preference, protecting both the bank and its clients. Working on this review gave me a direct understanding of how compliance and governance function in practice on a trading floor, and why they matter.

Profit and Loss (P&L)

Profit and Loss (P&L) is the daily measure of how much money a trading desk has made or lost. It captures the combined effect of market movements, trading activity, and fees. In my role within the Markets COO team, the P&L was one of the most important indicators I worked with. Each morning, the desks produced a flash P&L report, and my team consolidated these figures to produce management summaries that were reviewed by senior leadership. I also contributed to the analysis of P&L trends over time, identifying which desks were performing above or below forecast and understanding the drivers behind deviations. I learned that P&L is not just a financial result: it is a real-time signal of how well a desk is managing its positions, its risks, and its client relationships. Monitoring P&L every day gave me a concrete and dynamic view of how financial markets translate into business performance.

Why should I be interested in this post?

If you are a student in business or finance thinking about a career in financial markets, this post can help you understand what to expect from a first experience on a trading floor. Many students have a strong theoretical background in finance but are uncertain about how these concepts translate into day-to-day work. Through my experience at HSBC, I discovered that even a non-front-office role offers an exceptional vantage point: by working within the Markets COO team, I was exposed to P&L reporting, liquidity management, broker reviews, and budget processes that are central to how a bank manages its markets activities.

This post is also relevant if you are considering roles in Markets COO, Business Management, or Finance Control within a bank. These positions are often overlooked by students who focus exclusively on trading or sales, yet they offer direct exposure to the full scope of a markets division and are increasingly valued as a stepping stone toward front-office responsibilities. Whatever your target role, understanding how a trading floor operates, its rhythms, its pressures, and its culture, will give you a real advantage in interviews and on the job.

Related posts on the SimTrade blog

   ▶ Max ODEN Leveraged Finance: My Experience as an Analyst Intern at Haitong Bank

   ▶ Praduman AGRAWAL My Professional Experience as a Quantitative Analyst Intern at Findoc Financial Services

   ▶ Michel Henry VERHASSELT Trading strategies based on market profiles and volume profiles

   ▶ Mickael RUFFIN My Internship Experience as a Structured Finance Analyst at Société Générale

Useful resources

HSBC — Corporate and Institutional Banking (including Markets and Securities Services)

ESMA — European Securities and Markets Authority

BIS — OTC Derivatives Statistics

About the author

The article was written in July 2026 by Abel ARAYA (ESSEC Business School, Master in Finance, 2025).

   ▶ Discover all articles by Abel ARAYA

When custom software becomes a management decision

Axel RUDLOFF

In this article, Axel RUDLOFF (founder and President of Koragence, and a student at ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2025–2029) shares observations drawn from building and managing software engineering projects involving system integration, artificial intelligence (AI), DevOps and custom business applications. The article explains why a software project is not only a technical investment: it is also a managerial decision about productivity, risk, operating processes and capital allocation.

Introduction

Companies rarely decide to develop custom software when existing systems no longer support the way the business actually operates. An enterprise resource planning system (ERP), such as SAP, may need to exchange data with a customer relationship management system (CRM), supplier application programming interfaces (APIs), document-management tools or applications developed internally. Difficulties arise when these systems must share data reliably, enforce specific business rules and support critical processes without repeated manual entry.

At Koragence, the projects I supervise often involve synchronising ERPs, integrating partner APIs, automating document processing with AI, rebuilding business workflows, or implementing DevOps architectures. DevOps refers to the practices and tools used to automate, secure and monitor the development and operation of software. Depending on the business criticality of a project, the architecture may target 99.95% availability, or up to 99.99% when the infrastructure supports multi-region redundancy, load balancing and advanced incident-recovery mechanisms.

About Koragence

Koragence is a French digital-services company specialising in custom software, web engineering, and process automation. The company designs business applications, software-as-a-service (SaaS) platforms, internal tools, customer portals and technical integrations for companies, startups, associations and public organisations.

Koragence has delivered more than 20 projects for clients located in more than six countries and works with a network of more than 50 active collaborators and partner companies. This model makes it possible to assemble a team according to the specific needs of each assignment, including software development, user experience and user interface design (UX/UI), cloud infrastructure, cybersecurity, accessibility and data engineering.

Logo of Koragence.
Logo of Koragence
Source: the company.

My experience as founder and President

As founder and President, I am responsible for turning a business problem into a project that can be delivered economically and technically. This includes business development, qualification of client needs, project scoping, pricing, team selection, contractual discussions, delivery governance and long-term client relationships.

I also remain directly involved in product and technical decisions. On a typical assignment, I help identify the critical workflow, define the minimum useful scope, choose which components should be standard and which should be custom, coordinate the specialists involved, monitor delivery and manage relationships with clients.

My main responsibilities

My work can be divided into five areas: identifying operational problems with measurable business consequences; translating those problems into functional and technical features; building the right project team; controlling scope, budget, quality and delivery risk; and ensuring that the software creates value after deployment rather than becoming an additional tool that employees do not use.

Required skills and knowledge

This role requires both technical and managerial skills. Technical knowledge is necessary to assess architecture, security, integrations, databases and infrastructure. Business knowledge is equally important because the best technical solution is not always the best investment. A founder must also understand margins, cash flow, pricing, negotiation, contractual risk and the opportunity cost of allocating a team to one project rather than another.

The most important soft skills are active listening, synthesis, communication and decision-making under uncertainty. Clients rarely describe their problem in technical terms. It is therefore necessary to distinguish symptoms from root causes, challenge assumptions with diplomacy, and explain trade-offs to both technical and non-technical stakeholders.

What I have learned

The main lesson is that the quality of the initial diagnosis, the clarity of responsibilities and the realism of the scope have a major impact on project cost and delivery.

The invisible cost of a fragmented information system

One of the most frequent problems is the repeated entry of the same information into several systems. In one project for an industrial group with several hundred employees, a team spent more than 1,600 hours per year re-entering information from supplier catalogues into an internal database. Beyond the labour cost, this process created entry errors, inconsistencies between reference systems and disputes caused by contradictory information.

The software project removed this break in the information flow. Supplier data were collected automatically through standardized AI document extraction, checked for consistency and integrated into the internal SAP system. The economic value came from reducing labour and disputes with suppliers.

Integration has become a central management issue

Suppliers increasingly expose APIs, ERPs provide connectors, CRMs publish webhooks and most business software can exchange data automatically. This creates opportunities, but every external connection also becomes a dependency. A partner API may change version, become unavailable or modify its behaviour. Reliable software therefore requires monitoring, logging, error recovery, security controls and ongoing maintenance.

In another project, Koragence developed a platform capable of supervising more than 15 industrial machines through supplier APIs while centralising more than 1,100 alerts and distributing notifications across several channels. The architecture was designed to scale to 100 machines without replacing the underlying technical model.

This type of project illustrates why integration is a strategic issue. The system must not only work on launch day; it must continue to work when the number of users, machines, documents or external dependencies increases. Maintenance is therefore part of the investment decision from the beginning.

Artificial intelligence changes the economics of software and automation

In the past, automating supplier catalogues, technical data sheets, invoices and other documents required highly standardised formats and rules written separately for each source. In practice, these standards were often incomplete or inconsistently applied. AI models can now interpret a much wider variety of documents, extract useful information and feed databases or business software. This makes some automations faster and less expensive to implement.

However, AI does not remove the need for architecture, control and human judgment. A 2026 study of more than 100,000 software developers found that autonomous coding agents produced very large gains in coding activity, but smaller gains at the level of completed projects and actual releases. The authors interpret this difference as evidence that human and organisational bottlenecks still limit final output. In other words, writing code faster does not automatically mean shipping reliable software faster.

This distinction matters for managers. AI can lower the marginal cost of implementation, but the investment remains rational only when the company has correctly defined the workflow, data model, responsibilities, controls and expected return. The decision is therefore not “AI or no AI”; it is how AI can be integrated into a dependable operating system.

Economic, financial and business concepts related to my founder experience

I present below three concepts that are directly connected to my work at Koragence: transaction costs and the make-or-buy decision, return on investment and payback period, and operating leverage through reusable software assets.

Transaction costs and the make-or-buy decision

A company can buy standard software, adapt an existing product, outsource a custom development or build internally. The licence price is only one part of the decision. Managers must also consider transaction costs: integration work, manual reconciliation, training, vendor coordination, contract management, switching costs and the risk created by dependence on a supplier.

Standard software is usually preferable when the process is common and the product already satisfies the essential requirements. Custom software becomes more rational when the workflow is strategically important, highly specific, poorly served by standard tools or expensive to operate manually. My role is to help clients compare these alternatives rather than assume that custom development is always the correct answer.

Return on investment and payback period

Return on investment (ROI) compares the economic gains generated by a project with its total cost. For software, the benefits may include labour hours saved, fewer errors, faster sales cycles, reduced downtime, better compliance or additional revenue. The cost must include not only development, but also hosting, maintenance, training and change management.

The payback period measures how long it takes for cumulative benefits to recover the initial investment. For example, if an automation costs €40,000 and creates €5,000 of measurable monthly savings, its simple payback period is eight months. This calculation is not sufficient on its own, but it creates a common language between operational teams, finance teams and technical providers.

Operating leverage and reusable assets

Software can create operating leverage because the same technical system can support a higher volume of transactions without a proportional increase in labour. A platform designed for 15 machines and capable of supporting 100 machines illustrates this principle: the client can grow while avoiding the need to multiply manual supervision at the same rate.

The same logic applies to Koragence. Reusable components, documented deployment processes, quality controls and specialist partnerships reduce the cost and risk of future projects. Nevertheless, reuse must not become generic copy-and-paste delivery. The objective is to standardise the reliable foundations while preserving the business-specific layer that creates value for each client.

Why should I be interested in this post?

This topic is relevant to students interested in entrepreneurship, corporate finance, consulting, operations, private equity or digital transformation. Software investment decisions increasingly affect company valuation, operating margins, scalability and risk. Understanding these projects therefore requires more than technical knowledge.

For a finance student, custom software provides a concrete example of capital allocation: management commits resources today in exchange for expected future cash flows, cost savings or strategic flexibility. For a future consultant or entrepreneur, the article also shows why technology projects must be framed around measurable business outcomes rather than features alone.

Related posts on the SimTrade blog

   ▶ All posts about professional experiences

   ▶ Marco SIMONETTI Cristoforo Travel — From Zero to Exit: My Founder Story

   ▶ Alessandro MARRAS, Venture Capital 101: A Quick Overview

Useful resources

Academic research

Brynjolfsson, E., Li, D., & Raymond, L. R. (2025). Generative AI at Work , The Quarterly Journal of Economics, 140(2), 889–942.

Demirer, M., Musolff, L., & Yang, L. (2026). Writing Code vs. Shipping Code: Productivity Effects Across Generations of AI Coding Tools , NBER Working Paper No. 35275.

Williamson, O. E. (1989). Transaction Cost Economics , in Handbook of Industrial Organization, Volume 1, 135–182.

Lacity, M. C., Khan, S. A., & Willcocks, L. P. (2016). The role of Transaction Cost Economics in Information Technology Outsourcing research: A meta-analysis of the choice of contract type , The Journal of Strategic Information Systems, 25(1), 32–48.

Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and Managing the Value of Companies, Seventh Edition, Hoboken (NJ), John Wiley & Sons.

Business resources

Koragence — Company website

Koragence — When custom software still makes sense in 2026

National Bureau of Economic Research — AI coding tools and software delivery productivity

About the author

The article was written in July 2026 by Axel RUDLOFF, founder and President of Koragence and a student at ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2025–2029.

   ▶ Discover all articles by Axel RUDLOFF.

Will Trump be a blip in history?

Hubert Rodarie

In this article, Hubert RODARIE (Honorary President of the French Association of Institutional Investors — Af2i) introduces his latest book, Europe Confronting Trump, published by ESKA in May 2026.

This question lies at the heart of the analyses circulating in the media. Should Donald Trump’s election be viewed as an anomaly? Are all his decisions destined to be overturned by a new president, who will then be portrayed as responsible and serious?

Since 2016, the debate regarding Donald Trump has focused primarily on his personality, his provocations, and his excessive behavior. Most of his actions are described as erratic, questionable, and, above all, ineffective. Yet a fundamental question arises: how can we explain the bewilderment currently gripping Democrats in the United States, as well as leaders in the European Union and Washington’s Asian allies? A second question follows: how can we explain that, despite the Supreme Court’s overturning of the tariffs, the agreements reached in exchange for their adjustment or elimination have not been called into question but, on the contrary, have been confirmed (see, in particular, the European Parliament’s recent decision ratifying the July 2025 agreements)?

On May 14, 2026, L’Europe face à Trump (Europe Facing Trump) was published by ESKA. This book aims precisely to move beyond a superficial interpretation of events.

L’Europe face à Trump by Hubert Rodarie.
Couverture de l’ouvrage L’Europe face à Trump, par Hubert Rodarie
Source : ESKA Editions.

The author first demonstrates that Trump is neither an anomaly nor merely a media phenomenon. He derives his power from his ability to rally a majority of Americans who are currently dissatisfied with their living conditions. This ability is characteristic of demagogues, one of the most famous of whom was Pericles, yet he is considered one of the fathers of democracy. Trump and Pericles, the United States and Athens, do indeed share many similarities. Moreover, Trump relies heavily, in his actions, on a long-standing trend toward the concentration of executive powers at the federal level in the hands of the president. Yet this trend is common to both Democratic and Republican administrations. Trump thus acts by both mobilizing popular support and exploiting the underlying logic of the United States’ political organization.

Next, the author analyzes the foundations of a strategic project driven by a single ambition: to rebuild an autonomous American power. Unlike previous administrations, which continued the policies pursued over several decades, this strategy rests on three pillars that can be described as innovative:

  • The rebuilding of strategic power in the face of China, recognized as a systemic competitor. This is the direction set forth by the National Security Strategy of December 2025.
  • A trade policy, inspired by the Hamilton doctrine, to rebuild the United States’ capacity to produce goods and services. Presented in Davos in late January 2026, this doctrine signals the United States’ commitment to returning to the principles of the early GATT agreements: the American worker is once again the priority.
  • A monetary policy based on reaffirming the role of the dollar, abandoning unconventional monetary policies, returning to Treasury-led industrial policies, and prioritizing support for labor income over asset values. This direction, first outlined in late 2024, was confirmed by the appointment of Kevin Warsh as Chair of the Federal Reserve.

This therefore represents a historic attempt to overturn not only the principles that have governed the U.S. economy and its relations with the rest of the world for the past forty years, but also the balance of power within the U.S. executive branch, by further strengthening federal power relative to that of the states. In short, a radical transformation of American society is underway.

In parallel, this book examines the European Union’s capacity to respond, its vulnerabilities, and the essential transformation it must undertake in the face of this upheaval. Faced with a strategy that is as clear as it is unapologetic, the European Union must assert itself. But is it capable of doing so? Do its leaders truly have the will to do so?

An incisive essay that helps us understand, beyond the turmoil, the logic behind a major transformation.

About the author

This article was written in July 2026 by Hubert RODARIE (Honorary President of the French Association of Institutional Investors — Af2i).

   ▶ Discover all articles by Hubert RODARIE.

Trump sera-t-il un accident de l’Histoire ?

Hubert Rodarie

Dans cet article, Hubert RODARIE (président d’honneur de l’Association française des investisseurs institutionnels — Af2i) présente son dernier ouvrage, L’Europe face à Trump, paru en mai 2026 aux éditions ESKA.

Trump sera-t-il un accident de l’Histoire ? Cette question est au cœur des analyses véhiculées par les médias. Faut-il considérer l’élection de Donald Trump comme une anomalie ? Toutes ses décisions sont-elles vouées à être abrogées par un nouveau président, présenté alors comme responsable et sérieux ?

Depuis 2016, le débat autour de Donald Trump s’est principalement focalisé sur sa personnalité, ses provocations et ses excès. La plupart de ses actions sont décrites comme erratiques, contestables et, surtout, inefficaces. Pourtant, une première interrogation s’impose : comment expliquer la forme de sidération qui frappe aujourd’hui les démocrates aux États-Unis, ainsi que les dirigeants de l’Union européenne et des pays asiatiques alliés de Washington ? Une seconde question en découle : comment expliquer que, malgré l’annulation des droits de douane par la Cour suprême, les accords obtenus en contrepartie de leur modulation ou de leur suppression ne soient pas remis en cause, mais au contraire confirmés — voir notamment la récente décision du Parlement européen entérinant les accords de juillet 2025 ?

Le 14 mai 2026 est paru L’Europe face à Trump aux éditions ESKA. Cet ouvrage se propose précisément de rompre avec une lecture trop superficielle des événements.

L’Europe face à Trump, par Hubert Rodarie.
Couverture de l’ouvrage L’Europe face à Trump, par Hubert Rodarie
Source : Éditions ESKA.

L’auteur montre d’abord que Trump n’est ni une anomalie ni un simple phénomène médiatique. Son pouvoir, il le tient de sa capacité à rallier une majorité d’Américains aujourd’hui insatisfaits de leurs conditions de vie. Cette capacité est celle des démagogues, dont l’un des plus célèbres fut Périclès, pourtant considéré comme l’un des pères de la démocratie. Trump et Périclès, les États-Unis et Athènes présentent effectivement de nombreux points communs. Plus encore, Trump s’appuie largement, pour agir, sur une tendance séculaire à la concentration des pouvoirs exécutifs au niveau fédéral entre les mains du président. Or, cette évolution est commune aux administrations démocrates comme républicaines. Trump agit donc à la fois en mobilisant le soutien populaire et en exploitant les logiques profondes de l’organisation politique des États-Unis.

Dans un second temps, l’auteur analyse les fondements d’un projet stratégique porté par une ambition : reconstruire une puissance américaine autonome. Contrairement aux mandats précédents, qui s’inscrivaient dans la continuité des politiques menées depuis plusieurs décennies, cette stratégie repose sur trois piliers que l’on peut qualifier d’innovants :

  • La reconstruction d’une puissance stratégique face à la Chine, reconnue comme un concurrent systémique. C’est l’orientation définie par la Stratégie nationale de sécurité de décembre 2025.
  • Une politique commerciale, inspirée de la doctrine Hamilton, visant à reconstituer aux États-Unis des capacités de production de biens et de services. Présentée à Davos à la fin du mois de janvier 2026, cette doctrine marque la volonté des États-Unis de revenir aux principes des premiers accords du GATT : le travailleur américain redevient la priorité.
  • Une politique monétaire fondée sur la réaffirmation du rôle du dollar, l’abandon des politiques monétaires non conventionnelles, le retour à des politiques industrielles pilotées par le Trésor et la priorité donnée au soutien des revenus du travail plutôt qu’aux valeurs d’actifs. Cet axe, esquissé dès la fin de l’année 2024, a été confirmé par la nomination de Kevin Warsh à la présidence de la Réserve fédérale.

Il s’agit donc d’une tentative historique de renverser non seulement les principes qui régissent depuis quarante ans l’économie américaine et ses relations avec le reste du monde, mais aussi l’équilibre du pouvoir exécutif américain, en renforçant encore le pouvoir fédéral face à celui des États fédérés. En somme, une transformation radicale de la société américaine est engagée.

En miroir, l’ouvrage interroge la capacité de réaction de l’Union européenne, ses fragilités et la mutation indispensable qu’elle doit entreprendre face à cette rupture. Face à une stratégie aussi claire qu’assumée, l’Union européenne doit s’affirmer. Mais en est-elle capable ? Ses dirigeants en ont-ils réellement la volonté ?

Un essai incisif pour comprendre, au-delà du tumulte, la logique d’une transformation majeure.

À propos de l’auteur

Cet article a été écrit en juillet 2026 par Hubert RODARIE (président d’honneur de l’Association française des investisseurs institutionnels — Af2i).

   ▶ Découvrir tous les articles de Hubert RODARIE

The Implied Volatility Surface as a Decision-Support Framework for Systematic Cash-Secured Put Strategies

Frédéric Valognes

In this article, Frédéric VALOGNES, lecturer, author and Certified European Financial Analyst (CEFA®), examines whether the dynamics of the implied volatility surface may provide a decision-support framework for systematic cash-secured put strategies.

Abstract

The Black-Scholes-Merton model remains one of the most influential developments in modern financial economics. Whilst its mathematical formulation continues to provide the benchmark for pricing European options, one of its central assumptions — namely that volatility remains constant throughout the life of an option — is persistently contradicted by observed market prices.

Rather than constituting a weakness of the model, these discrepancies reveal valuable information regarding investors’ expectations, market sentiment and the pricing of downside risk. The resulting volatility skews and smiles have therefore become essential components of both academic research and professional option trading.

This paper argues that the implied volatility surface should not be viewed solely as a pricing adjustment. Its geometry and, more importantly, its evolution over time may provide additional information capable of assisting investment decisions. Attention is devoted to cash-secured short put strategies, for which the level of implied volatility alone frequently proves insufficient.

Drawing upon preliminary observations obtained from listed CAC 40 index options across several maturities, the article explores whether the dynamics of the implied volatility surface may constitute a useful decision-support indicator. Rather than proposing a predictive pricing model, the objective is to examine whether changes in the shape, slope and term structure of implied volatility can contribute to a more disciplined framework for identifying favourable market environments in which to initiate systematic cash-secured put strategies.

Introduction

Within option markets, implied volatility occupies a rather singular position. Originally introduced as the unknown parameter required to reconcile observed option prices with the Black-Scholes-Merton valuation model, it has progressively evolved from a purely technical pricing input into one of the most closely monitored indicators in financial markets. Today, implied volatility is commonly interpreted not simply as a pricing parameter, but as a market-based measure of uncertainty, reflecting the aggregate expectations of thousands of market participants.

For investors employing cash-secured short put strategies, that is, selling put options while maintaining sufficient cash reserves to purchase the underlying asset if assignment occurs, implied volatility plays an obvious practical role. Higher implied volatility generally translates into higher option premiums, thereby increasing the potential income associated with selling options. This simple observation has encouraged many practitioners to associate elevated implied volatility with favourable selling opportunities.

Experience, however, suggests that such a conclusion is frequently incomplete. Periods characterised by exceptionally high implied volatility often coincide with episodes of considerable financial stress, during which uncertainty continues to increase and option premiums expand further. Entering short option positions solely because implied volatility appears elevated may therefore expose investors to significant mark-to-market losses before market conditions eventually stabilise.

The question addressed in this article is therefore slightly different.

Rather than asking whether implied volatility is high, it may be more appropriate to ask whether the behaviour of the implied volatility surface itself contains additional information capable of assisting investment decisions.

More specifically, can the dynamics of the implied volatility surface, particularly the evolution of the downside volatility skew, provide useful information regarding changing market conditions? Since deep out-of-the-money put options typically incorporate a substantial premium reflecting institutional demand for portfolio insurance, does a progressive flattening of the skew signal that market stress is easing while option premiums remain comparatively attractive?

If such behaviour can be observed consistently, the volatility surface ceases to be merely an output of an option pricing model. Instead, it becomes a potential decision-support framework, capable of complementing more traditional criteria such as premium level, strike selection or time to maturity.

The purpose of the present article is not to challenge the theoretical foundations of the Black-Scholes-Merton model. On the contrary, the model remains indispensable, since implied volatility itself is extracted from its pricing equation. The objective is rather to investigate whether the systematic departures observed between theoretical assumptions and market prices may themselves convey exploitable information through the dynamics of the implied volatility surface, thereby supporting decisions regarding option selection, strike prices, market conditions and the implementation of systematic cash-secured put strategies.

Figure 1. Transfer of Risk Between Option Buyer and Option Seller

Figure 1. Options transfer market risk between two counterparties with fundamentally different expectations. Whilst the buyer acquires protection against adverse price movements, the seller receives an option premium in exchange for assuming the corresponding contingent obligation. This transfer of risk constitutes the economic foundation upon which option markets operate and explains the central role played by option premiums in systematic short-put strategies.

The following sections revisit the theoretical foundations of implied volatility before examining why market observations systematically depart from the assumptions of constant volatility. Attention is subsequently devoted to the informational content embedded within volatility skews and smiles, leading to the introduction of a practical analytical framework intended to investigate whether changes in the implied volatility surface may contribute to the identification of favourable environments for systematic cash-secured put-selling.

The Black-Scholes-Merton Framework: An Elegant Model Built upon Simplifying Assumptions

Since its publication in 1973, the Black-Scholes-Merton model has become one of the most influential achievements in financial economics. Beyond providing a closed-form solution for the valuation of European options, it established a rigorous mathematical framework linking derivative prices to the stochastic behaviour of the underlying asset. More than half a century later, despite the emergence of increasingly sophisticated numerical models, Black-Scholes remains the common language of option markets.

Its enduring success stems from the remarkable intuition underlying the model. Rather than attempting to forecast future prices directly, Black-Scholes demonstrates that an option may be replicated through a continuously adjusted portfolio combining the underlying asset and a risk-free investment. Under a specific set of assumptions, this replication argument leads to a unique theoretical option value independent of investors’ individual expectations.

These assumptions are well known. Asset prices are assumed to follow a geometric Brownian motion with constant volatility. Markets are perfectly liquid and frictionless, allowing continuous trading without transaction costs or taxes. Interest rates remain constant throughout the life of the contract, whilst European options can only be exercised at maturity. Finally, market participants are assumed to behave rationally and possess homogeneous expectations.

From a practical perspective, few of these assumptions are fully satisfied in real financial markets. Transaction costs exist, volatility varies continuously, liquidity fluctuates and investors frequently react in heterogeneous ways to new information. Nevertheless, the model remains extraordinarily useful because it provides a coherent reference framework from which market observations may subsequently be interpreted.

One of its most significant contributions lies in the concept of implied volatility. Rather than treating volatility as an observable market variable, the Black-Scholes equation can be solved inversely. By inserting the observed option premium together with the remaining market parameters, it becomes possible to determine the level of volatility required for the theoretical model to reproduce the market price exactly. This inferred quantity is known as implied volatility.

Implied volatility therefore represents considerably more than a simple mathematical parameter. It embodies the level of uncertainty collectively embedded within option prices by market participants. Every quoted option premium implicitly reflects the market’s assessment of future price variability, making implied volatility one of the most informative indicators available to option traders.

Yet an important observation immediately follows. If the assumptions of the Black-Scholes model were perfectly satisfied, every option sharing the same maturity would exhibit the same implied volatility, irrespective of its strike price. Reality tells a rather different story.

Figure 2. Call and Put: The Economic Foundations of Option Contracts

Figure 2. A call option grants its holder the right, but not the obligation, to purchase the underlying asset at a predetermined strike price. Conversely, a put option grants the right to sell the underlying asset under identical contractual conditions. In both cases, the buyer acquires a right by paying an option premium, whilst the seller receives that premium in exchange for assuming the corresponding contingent obligation.

Implied volatility: From a Single Parameter to a Market Indicator

The original formulation of Black-Scholes implicitly assumes that volatility constitutes a characteristic of the underlying asset itself. If this were strictly true, every option written on the same asset and sharing an identical maturity would produce the same implied volatility once observed market prices are introduced into the valuation equation.

Empirical evidence has demonstrated otherwise. When implied volatilities are computed across a range of strike prices, they rarely remain constant. Instead, they exhibit systematic patterns whose shape varies according to both the underlying asset and prevailing market conditions. These observations, initially regarded as anomalies, have gradually become recognised as fundamental characteristics of option markets. The discrepancy is not accidental. It reflects the collective behaviour of investors rather than any mathematical imperfection within the pricing equation itself.

Institutional investors, pension funds and asset managers frequently purchase out-of-the-money put options to protect equity portfolios against severe market declines. This persistent demand for downside insurance increases put premiums relative to those predicted under constant volatility assumptions. Consequently, implied volatilities extracted from these option prices become progressively higher as strike prices decrease.

The resulting asymmetry gives rise to what practitioners commonly describe as the volatility skew. Rather than representing a flaw in Black-Scholes, the skew reveals how financial markets collectively price extreme downside events. It therefore provides direct insight into investors’ perception of risk, their appetite for protection and the relative scarcity of option sellers willing to assume such exposure.

Viewed from this perspective, implied volatility ceases to be merely an intermediate calculation. It becomes a market variable, capable of conveying valuable information regarding the balance between fear and confidence prevailing amongst market participants.

From the Volatility smile to the Volatility skew

When implied volatilities are calculated across a range of strike prices for a given maturity, the resulting profile rarely corresponds to the horizontal line predicted by the Black-Scholes-Merton model. Instead, distinct empirical patterns emerge according to both the underlying asset and prevailing market conditions.

The earliest observations concerned currency and commodity options, where implied volatility frequently followed a symmetrical U-shaped profile. Deep in-the-money and deep out-of-the-money options exhibited higher implied volatilities than contracts whose strike prices were close to the prevailing market price. This phenomenon rapidly became known as the volatility smile, reflecting the characteristic curvature obtained when implied volatilities were plotted against strike prices.

The market crash of October 1987 marked a decisive turning point in option pricing. Following the unprecedented decline in global equity markets, practitioners observed that the Black-Scholes-Merton assumption of constant volatility no longer matched market prices. Implied volatilities began to differ substantially across strike prices, particularly for downside put options, reflecting investors’ increased demand for protection against extreme losses. Rather than attempting to force market prices into a single volatility parameter, traders progressively adopted the implied volatility surface itself as the practical input for option valuation. Since then, the smile and, even more prominently, the volatility skew have become standard features of option markets and indispensable tools for pricing, hedging and risk management.

Although initially regarded as an anomaly, the volatility smile gradually became recognised as a natural consequence of market behaviour rather than a failure of financial theory. Financial returns do not follow the perfectly lognormal distribution assumed by the Black-Scholes-Merton framework. Instead, empirical distributions exhibit heavier tails, occasional jumps and varying degrees of asymmetry, all of which contribute to systematic differences in implied volatility across strike prices.

Equity index options, however, generally display a markedly different pattern. Rather than producing a symmetrical smile, implied volatility typically increases as strike prices decrease. Conversely, call options with higher strike prices tend to exhibit progressively lower implied volatilities. The resulting profile no longer resembles a smile but rather a downward-sloping curve commonly referred to as the volatility skew.

This asymmetry is far from accidental. It reflects the structural demand for downside protection that characterises modern equity markets. Pension funds, insurance companies, institutional asset managers and other long-term investors regularly purchase out-of-the-money put options to protect diversified equity portfolios against severe market downturns. Such contracts effectively operate as insurance policies against extreme market events.

As demand for these protective puts increases, their market prices rise beyond the levels predicted by constant-volatility models. Once these prices are translated back into implied volatilities through the Black-Scholes equation, lower strike prices systematically exhibit higher implied volatility. The volatility skew therefore represents considerably more than a graphical curiosity. It provides a direct visual representation of how financial markets collectively price downside risk.

Rather than indicating that the Black-Scholes model has failed, the skew demonstrates that investors attribute different probabilities to upward and downward market movements. In practice, the cost of insuring against a sharp decline is significantly greater than the cost of participating in an equally pronounced upward movement. For option sellers, this distinction is of particular importance.

The additional premium associated with out-of-the-money put options constitutes the primary source of return for many systematic short-put strategies. Yet this additional premium simultaneously reflects the market’s perception of elevated downside risk. The option seller is therefore continuously confronted with a fundamental trade-off: richer premiums are generally accompanied by greater uncertainty.

Understanding this relationship represents the first step towards interpreting implied volatility not merely as a pricing parameter, but as a genuine source of market information.

Figure 3. Black-Scholes-Merton Model with Continuous Dividend Yield

Figure 3. Under the Black-Scholes assumption of constant volatility, implied volatility should remain identical across strike prices. Empirical observations reveal two distinct market structures: the volatility smile, historically observed in several currency option markets, and the downward volatility skew that characterises most equity index options.

The Volatility skew as a Measure of Collective Risk Perception

Traditional option pricing theory treats implied volatility as a parameter required to value derivative contracts. Market practitioners increasingly adopt a rather different perspective. For many traders, implied volatility has progressively become an observable market variable.

Its level reflects the price investors collectively assign to uncertainty, whilst its distribution across strike prices reveals how that uncertainty is allocated between favourable and unfavourable market scenarios. This distinction is fundamental.

If all future price movements were regarded as equally probable, the volatility surface would remain broadly symmetrical. The persistent existence of a downward skew instead demonstrates that investors consistently attribute a greater economic significance to adverse market movements than to equivalent upward fluctuations. In this respect, the volatility skew may be interpreted as a continuously updated measure of collective risk aversion.

Unlike conventional market indicators, which frequently rely upon historical observations, implied volatility incorporates forward-looking expectations embedded directly within option prices. Every transaction reflects the judgement of buyers and sellers regarding future uncertainty. The resulting volatility surface therefore aggregates thousands of independent market assessments into a single observable structure. From the perspective of a systematic put seller, the implications are immediate.

Periods during which the skew becomes exceptionally steep frequently coincide with heightened demand for downside protection. Conversely, a gradual flattening of the skew may indicate that the market is beginning to reassess the likelihood of extreme adverse scenarios.

The central hypothesis explored throughout the remainder of this article is based precisely upon this observation. Rather than considering implied volatility in isolation, greater attention may usefully be devoted to the evolution of the entire volatility surface.

Looking Beyond Implied volatility: Can the Volatility surface Become a Decision-Support Tool?

For most option practitioners, implied volatility is primarily regarded as a pricing variable. Whether calculated directly from market quotations or displayed by professional trading platforms, it is generally interpreted as a measure of the market’s expectation of future uncertainty. Consequently, trading decisions often rely upon a relatively simple observation: higher implied volatility produces higher option premiums.

For investors writing cash-secured puts, this relationship is naturally attractive. Selling options during periods of elevated implied volatility allows the collection of larger premiums whilst maintaining identical contractual obligations. Yet this apparent advantage immediately raises a practical difficulty.

Periods characterised by elevated implied volatility rarely occur in isolation. They are frequently associated with deteriorating market sentiment, increasing downside risk and heightened investor demand for protection. In such circumstances, high option premiums merely compensate sellers for assuming substantially greater uncertainty. The absolute level of implied volatility therefore provides only a partial description of market conditions. A more informative question may instead concern the behaviour of implied volatility itself.

Is the volatility surface continuing to steepen? Has it reached a plateau? Or has it begun to return progressively towards more stable market conditions?

These questions introduce an important distinction between two different approaches to option selling. The first consists simply of identifying expensive options based on their implied volatility. The second seeks to determine whether market conditions themselves have begun to evolve in favour of the option seller. The distinction is subtle but potentially significant.

A market characterised by high implied volatility, and an increasingly steep volatility skew reflects persistent demand for downside protection. Under such circumstances, option premiums may continue to increase despite already appearing historically elevated.

Conversely, if implied volatility remains relatively high whilst the overall structure of the volatility surface begins to normalise, market expectations may be undergoing a gradual transition. Although uncertainty remains elevated, the balance between buyers and sellers of protection may already be changing.

From the perspective of a systematic option seller, such an environment appears fundamentally different. The option premium remains attractive, yet the dynamics of market expectations may already be evolving towards greater stability. This observation forms the central hypothesis explored in the present work.

Rather than evaluating implied volatility solely through its absolute level, the proposed approach investigates whether the progressive normalisation of the implied volatility surface may itself constitute useful information capable of assisting the timing of cash-secured short put strategies.

Importantly, this hypothesis should not be interpreted as an attempt to forecast future market prices. No volatility model can predict future market movements with certainty. Instead, the objective is considerably more modest.

The purpose is to investigate whether the collective information continuously embedded within option prices can be organised into a coherent analytical framework capable of improving the selection of favourable option-selling environments.

Three Market Environments for Systematic Put Selling

Figure 4. The proposed framework focuses less on the absolute level of implied volatility than on the evolution of the volatility surface itself. A gradual normalisation of the skew whilst option premiums remain comparatively elevated may provide a more favourable environment for initiating systematic cash-secured put positions.

Towards a Decision-Support Framework Based on Volatility surface Dynamics

The preceding discussion naturally raises a practical question: if the geometry of the implied volatility surface reflects the collective assessment of market risk, can its evolution also provide useful information regarding the timing of option-selling strategies?

This question forms the starting point of the present investigation. Rather than considering implied volatility as a static variable observed at a single point in time, the proposed framework examines the volatility surface as a dynamic structure whose characteristics evolve continuously in response to changing market expectations. The distinction is important.

Most market participants focus primarily on the absolute level of implied volatility. Elevated implied volatility is generally interpreted as an opportunity to collect richer option premiums, whilst low implied volatility often discourages option-selling strategies. Such reasoning, however, overlooks an essential aspect of market behaviour.

Two market environments may exhibit comparable average implied volatilities whilst reflecting fundamentally different underlying conditions.

In the first case, implied volatility may still be increasing, accompanied by a progressively steeper volatility skew and a persistent demand for downside protection. In the second, implied volatility may remain elevated, but the volatility surface itself may already be beginning to stabilise, suggesting that market participants are gradually reassessing the probability of extreme downside events.

From the perspective of a systematic put seller, these two situations should not necessarily be regarded as equivalent. Although option premiums may appear imilarly attractive, the evolution of collective market expectations differs substantially.

The working hypothesis explored throughout this study is therefore deliberately modest. Rather than attempting to predict future market prices, the objective is to determine whether the progressive normalisation of the implied volatility surface may provide additional information capable of assisting the selection of favourable market environments for initiating cash-secured short put positions.

In this respect, the volatility surface is not viewed as a forecasting instrument. Instead, it is interpreted as a continuously updated representation of market sentiment whose evolution may contribute to a more disciplined investment process.

Decision-Support Framework

Figure 5. General workflow of the proposed analytical framework. Market option prices are first converted into implied volatilities using the Black-Scholes-Merton model. The resulting volatility surface is subsequently analysed through a series of descriptive indicators before being interpreted within a decision-support framework for systematic cash-secured put strategies.

Methodological Approach

The methodology developed in this work follows a sequence of analytical steps intended to transform raw market quotations into interpretable market indicators.

The process begins with the systematic collection of listed option prices for a given underlying asset and maturity. Preference is given to highly liquid option contracts to minimise distortions resulting from wide bid-ask spreads or infrequent trading activity.

Observed market premiums are then converted into implied volatilities through the inverse application of the Black-Scholes-Merton pricing equation. Once computed across the available strike prices, these implied volatilities collectively define the observed volatility surface for the selected maturity.

Rather than analysing each implied volatility independently, several global characteristics of the surface are examined simultaneously.

Attention is devoted to:

  • the overall level of implied volatility;
  • the slope of the volatility skew;
  • the degree of cross-sectional dispersion across strike prices;
  • the temporal evolution of these characteristics between successive market observations.

The purpose of this multidimensional approach is to characterise market conditions more comprehensively than would be possible through the observation of implied volatility alone. Naturally, not all option markets exhibit comparable behaviour.

The preliminary investigations presented in this article suggest that market liquidity and option maturity play a decisive role in determining the regularity of the resulting volatility surface. Highly liquid equity index options with medium- to long-term maturities appear particularly well suited to this type of analysis, whereas shorter maturities or less actively traded underlying assets may generate substantially noisier implied volatility structures.

These observations should not be interpreted as definitive conclusions. Rather, they provide an empirical motivation for the exploratory analyses presented in the following section.

Methodological Approach

Figure 6. Illustrative workflow describing the successive stages of the proposed methodology: market data acquisition, implied volatility computation, volatility surface construction, statistical charac-terisation and decision-support interpretation.

Preliminary Empirical Observations

The analytical framework presented above was subsequently applied to listed option data to examine whether the proposed interpretation of the implied volatility surface could be observed under actual market conditions.

At this stage, the objective was not to perform an exhaustive statistical validation of the methodology. Rather, the purpose was to investigate whether the dynamics of the implied volatility surface exhibited sufficiently regular behaviour to justify further quantitative analysis.

Several option chains were therefore examined, covering different underlying assets and maturities.

Attention was devoted to the CAC 40 index, whose option market offers a high level of liquidity across a broad range of strike prices. Additional observations were conducted on selected individual equities to assess the robustness of the approach under different market conditions.

The first observation concerns the influence of option maturity.

Short-dated options, particularly those approaching expiration, frequently generated irregular implied volatility profiles. Individual quotations occasionally produced local distortions, whilst relatively small pricing discrepancies resulted in disproportionately large variations in calculated implied volatility. Such behaviour appears consistent with the increasing influence of time decay and the reduced amount of remaining time value as maturity approaches.

Consequently, short maturities should be interpreted with caution when constructing continuous volatility surfaces. A markedly different picture emerged for longer maturities.

Options with approximately six months to one year remaining until expiration generally produced substantially smoother implied volatility structures. The resulting volatility skews exhibited the regular downward slope commonly described in the empirical literature, with only limited local distortions across neighbouring strike prices.

These observations proved particularly apparent for the CAC 40 index.

The high liquidity of the option market appeared to facilitate a more stable estimation of implied volatility, thereby providing a significantly more coherent representation of the underlying volatility surface. An equally important observation concerns the distinction between index options and individual equity options.

Whilst the CAC 40 generated relatively stable and interpretable volatility structures, several individual equities produced substantially noisier results. In certain cases, isolated market quotations generated implausibly high or even negative implied volatility estimates, suggesting either temporary pricing inconsistencies or insufficient market liquidity.

Such observations reinforce an important practical consideration.

The proposed methodology appears particularly well suited to highly liquid option markets where quoted premiums reflect continuous interaction between buyers and sellers. Conversely, less liquid markets may introduce local pricing distortions capable of obscuring the global characteristics of the volatility surface.

These preliminary observations do not constitute definitive statistical conclusions.

Nevertheless, they suggest that both liquidity and maturity represent essential prerequisites when analysing implied volatility surfaces for decision-support purposes.

Implied Volatility Curves

Figure 7. Comparison of implied volatility curves obtained for different maturities. Short-dated maturities frequently exhibit irregular local behaviour owing to limited time value and increased pricing sensitivity. Longer maturities generally produce smoother volatility skews, thereby facilitating the interpretation of surface dynamics.

A further observation emerged during the analysis: although several volatility surfaces displayed the expected downward skew, not all of them generated identical decision-support signals.

Certain maturities exhibited a progressive flattening of the skew whilst implied volatility remained at comparatively elevated levels. Others retained a persistent steep slope despite similar average volatility levels. This distinction proved particularly informative. If confirmed through broader empirical investigation, it suggests that the overall geometry of the volatility surface may contain additional information beyond the absolute level of implied volatility alone. From the perspective of systematic option selling, this observation may prove significant.

A market characterised by elevated implied volatility, and a progressively normalising volatility surface appears fundamentally different from one in which both implied volatility and downside protection demand continue to increase simultaneously.

The former may correspond to a market gradually returning towards equilibrium. The latter may still reflect an environment dominated by uncertainty.

Consequently, analysing the dynamics of the volatility surface rather than its static characteristics alone may provide a richer description of prevailing market conditions.

The following section illustrates how these observations may be translated into a practical decision-support framework for systematic cash-secured put strategies.

Discussion

The preliminary observations presented above suggest that the practical usefulness of the implied volatility surface depends upon two essential conditions: the quality of market data and the maturity of the option contracts under consideration.

The first point appears relatively intuitive.

Implied volatility is not directly observable. It is inferred from quoted option prices through the inverse application of the Black-Scholes-Merton model. Consequently, any inconsistency in market quotations is immediately reflected in the calculated implied volatilities.

This phenomenon proved particularly evident during the exploratory analyses conducted on individual equities.

Whilst certain option chains generated coherent volatility structures, others produced isolated implied volatility values that were incompatible with neighbouring strike prices. In a limited number of cases, implausible or unstable implied volatility estimates were obtained despite apparently valid market quotations. Such behaviour most likely reflects temporary liquidity deficiencies, unusually wide bid-ask spreads or isolated transactions executed outside normal market conditions.

These observations underline an important methodological requirement.

The proposed framework should preferably be applied to option markets characterised by sufficient liquidity and a broad distribution of actively traded strike prices. Under such conditions, quoted premiums are more likely to represent the consensus valuation of market participants rather than isolated transactions.

The second observation concerns option maturity.

Short-dated contracts frequently produced irregular volatility profiles whose local fluctuations appeared dominated by pricing noise rather than genuine changes in market expectations. As expiration approaches, the remaining time value becomes progressively smaller, and option prices exhibit increasing sensitivity to relatively minor changes in the underlying asset. Consequently, the resulting implied volatility estimates become substantially less stable.

Conversely, medium- and long-dated maturities generally generated considerably smoother volatility structures.

The downward skew remained clearly identifiable whilst local distortions became significantly less pronounced. This regularity considerably facilitated the interpretation of the surface and its evolution over successive market observations.

Among the datasets examined, listed CAC 40 index options consistently provided the most coherent results. Their combination of high liquidity, narrow bid-ask spreads and broad strike availability produced volatility surfaces whose overall geometry remained remarkably stable. This characteristic makes such instruments particularly well suited to exploratory research concerning the dynamics of implied volatility.

An additional observation deserves particular attention: not every regular volatility surface generated the same analytical conclusion.

Certain maturities displayed a progressive flattening of the volatility skew whilst implied volatility remained comparatively elevated. Others retained a persistent and pronounced downward slope despite exhibiting similar average volatility levels. This distinction appears especially interesting.

If future empirical analyses confirm these preliminary observations, the evolution of the volatility surface may provide information that cannot be obtained from the absolute level of implied volatility alone. Such a conclusion would carry practical implications for systematic option-selling strategies.

Rather than selecting opportunities exclusively according to premium levels or historical volatility, investors may benefit from incorporating the dynamics of the implied volatility surface into their broader decision-making process. Naturally, these findings should be interpreted with appropriate caution.

The present work remains exploratory in nature and does not claim to establish a predictive model. Instead, it proposes an analytical framework intended to organise market information already embedded within option prices into a more coherent decision-support process.

Further empirical investigation involving longer observation periods, multiple market regimes and additional underlying assets will naturally be required before more general conclusions may be drawn.

Evolution of the Implied Volatility Surface

Figure 8. Evolution of the implied volatility surface across successive market observations. The figure illustrates the conceptual distinction between a market in which the volatility skew continues to steepen and one in which the surface progressively normalises whilst implied volatility remains comparatively elevated.

Practical Implications for Systematic Put Sellers

From a practical perspective, the observations discussed throughout this article suggest that implied volatility should perhaps be interpreted less as an isolated numerical indicator and more as one component of a broader analytical framework.

Option sellers have traditionally focused on premium maximisation. Although this objective remains entirely legitimate, premium alone provides only a partial description of prevailing market conditions.

The same premium may arise under markedly different market environments. One may correspond to an increasingly stressed market characterised by rapidly rising demand for downside protection. Another may reflect a market in which uncertainty remains elevated but has already begun to stabilise.

Distinguishing between these situations may prove particularly valuable when implementing systematic cash-secured put strategies. Rather than attempting to forecast market direction, the proposed framework encourages a more disciplined interpretation of the information continuously embedded within option prices.

In this respect, the implied volatility surface becomes considerably more than a graphical representation of option quotations. It evolves into a dynamic indicator describing the collective perception of risk within financial markets.

Conclusion

The Black-Scholes-Merton model remains the fundamental reference upon which modern option pricing is built. Although one of its central assumptions — constant volatility — is systematically contradicted by market observations, these apparent discrepancies have progressively become one of the richest sources of information available to option practitioners.

The implied volatility surface should therefore not merely be regarded as a technical consequence of option pricing theory. It reflects the collective judgement of market participants regarding future uncertainty, the asymmetrical pricing of downside risk and the continuously evolving balance between buyers and sellers of financial protection. The purpose of the present study has been to explore whether this information may be exploited beyond its traditional pricing function.

Rather than concentrating exclusively on the absolute level of implied volatility, this article has proposed a broader analytical perspective based upon the dynamics of the entire volatility surface. Attention has been devoted to the progressive evolution of the volatility skew, whose gradual normalisation may provide additional insight into changing market conditions.

The preliminary empirical observations presented throughout this paper suggest practical conclusions.

First, market liquidity appears to constitute a fundamental prerequisite for obtaining sufficiently stable implied volatility surfaces. Highly liquid option markets, such as listed CAC 40 index options, produce considerably more coherent structures than many individual equity options, whose implied volatilities may occasionally be distorted by isolated transactions or limited trading activity.

Secondly, option maturity also plays a decisive role. Medium- and long-dated contracts generally generate smoother volatility surfaces that appear more suitable for structural analysis than very short-dated maturities, where the increasing influence of time decay frequently introduces substantial local irregularities.

Finally, and perhaps most importantly, the observations suggest that two markets exhibiting comparable average implied volatility levels may nevertheless convey markedly different information through the geometry of their respective volatility surfaces. This distinction may prove particularly relevant for systematic cash-secured put strategies.

Whilst elevated implied volatility undoubtedly increases option premiums, the progressive normalisation of the volatility surface may provide complementary information regarding the evolution of collective market expectations. The proposed framework should therefore not be interpreted as a predictive model. Financial markets remain inherently uncertain, and no analytical methodology can eliminate investment risk.

Instead, the approach presented here seeks to organise information already embedded within option prices into a structured decision-support framework capable of complementing more traditional valuation techniques. Viewed from this perspective, the implied volatility surface ceases to be merely a graphical representation of option prices. It becomes a dynamic description of market behaviour.

Understanding how this structure evolves through time may ultimately prove as informative as measuring its absolute level at any single observation date.

Limitations and Future Research

The present study should be regarded as an exploratory investigation rather than a definitive empirical validation. Several limitations naturally remain.

The observations reported here are based upon a limited number of underlying assets and observation dates. Broader empirical investigations covering multiple market regimes, longer historical periods and additional asset classes will be required before more general conclusions may be established. Future research could also investigate whether quantitative indicators describing the geometry of the implied volatility surface — such as skew slope, local curvature or cross-sectional dispersion — may be systematically incorporated into algorithmic decision-support models for option-selling strategies.

Another promising avenue concerns the comparative behaviour of implied volatility surfaces across different asset classes, including equity indices, individual equities, exchange-traded funds and commodity options.

Finally, machine learning techniques may eventually provide complementary tools capable of identifying recurring patterns within the evolution of volatility surfaces. Such approaches, however, should be viewed as extensions of the present analytical framework rather than substitutes for the economic interpretation of market behaviour. Ultimately, the principal contribution of this work lies less in proposing a new pricing model than in suggesting an alternative way of interpreting information already contained within option markets. If the geometry of the implied volatility surface indeed reflects the collective perception of financial risk, then monitoring its evolution may offer valuable additional insight into the timing of systematic option-selling strategies.

Download the Summary Infographic

Readers wishing to retain a concise visual summary of the concepts presented throughout this article may download the accompanying high-resolution infographic below.

Download the Summary Infographic (High-Resolution PDF)

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Useful resources

Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637-654.

Gatheral, J. (2006). The Volatility Surface: A Practitioner’s Guide. John Wiley & Sons.

Hull, J. C. (2024). Options, Futures and Other Derivatives (11th ed.). Pearson.

Merton, R. C. (1973). Theory of Rational Option Pricing. The Bell Journal of Economics and Management Science, 4(1), 141-183.

Natenberg, S. (2015). Option Volatility and Pricing (2nd ed.). McGraw-Hill Education.

Rebonato, R. (2004). Volatility and Correlation: The Perfect Hedger and the Fox. John Wiley & Sons.

Taleb, N. N. (1997). Dynamic Hedging: Managing Vanilla and Exotic Options. John Wiley & Sons.

About the Author

Tis article was written in July 2026 by Frédéric VALOGNES , who is a lecturer in corporate finance, financial analysis, financial markets and derivatives, with more than twenty-five years of professional experience spanning financial management, higher education, research administration and executive training. He is a Certified European Financial Analyst (CEFA®), a professional designation awarded by the European Federation of Financial Analysts Societies (EFFAS), Frankfurt.

Author’s Note

This article is intended solely for educational and research purposes. It presents the author’s personal reflections on implied volatility, option pricing and systematic option-selling strategies. It should not be construed as investment advice or as a recommendation regarding any financial instrument or trading strategy.

The ideas developed in this article are the result of many years of teaching, professional practice and ongoing research in corporate finance, financial analysis, financial markets and derivatives. They have also been enriched by numerous discussions with academics, finance professionals and market practitioners, whose expertise, critical insights and constructive exchanges have played an important role in shaping the analytical framework presented here.

The author wishes to express his sincere gratitude to all those who have contributed, directly or indirectly, to the development of these ideas. Their encouragement, intellectual generosity and commitment to rigorous financial analysis have been a constant source of inspiration.