A Volatility Regime is a persistent market state characterized by a particular level and behavior of volatility. Markets don't smoothly transition between volatility levels—they tend to cluster in distinct regimes, each with its own dynamics for price action, options pricing, and dealer exposure.

Common Volatility Regimes

Low Volatility Regime

• VIX typically: 10-15
• Daily ranges: 0.3-0.6%
• Characteristics: Grinding trends, dip-buying works, short volatility strategies outperform
• Gamma environment: Usually positive
• Dominant exposure: Charm (time decay flows visible)

Normal Volatility Regime

• VIX typically: 15-20
• Daily ranges: 0.6-1.0%
• Characteristics: Balanced two-way action, moderate mean-reversion
• Gamma environment: Mixed, near gamma flip
• Dominant exposure: Gamma and charm balanced

High Volatility Regime

• VIX typically: 20-30
• Daily ranges: 1.0-2.0%
• Characteristics: Increased trending, momentum strategies improve
• Gamma environment: Often negative
• Dominant exposure: Vanna (vol changes drive hedging)

Crisis Volatility Regime

• VIX typically: 30+
• Daily ranges: 2.0%+
• Characteristics: Violent swings, correlations spike, liquidity evaporates
• Gamma environment: Deeply negative
• Dominant exposure: Vanna dominates, feedback loops intensify

Regime Detection

Identifying the current regime helps calibrate expectations:

Indicator	Low Vol	Normal	High Vol	Crisis
VIX Level	<15	15-20	20-30	30+
VIX Term Structure	Steep contango	Mild contango	Flat/mild backwardation	Inverted
Aggregate GEX	Positive	Mixed	Negative	Deeply negative
Realized vs Implied	RV < IV	RV ≈ IV	RV > IV	RV >> IV

Why Regimes Matter for Exposure

Different exposures dominate in different regimes:

Low Volatility Regime

• Gamma: Moderate influence, keeps ranges tight
• Vanna: Muted (IV isn't moving much)
• Charm: Visible, drives predictable overnight flows

High Volatility Regime

• Gamma: Amplifies moves (dealers often short gamma)
• Vanna: Dominant driver, vol changes trigger cascading hedges
• Charm: Overwhelmed by gamma/vanna effects

Understanding which exposure dominates helps interpret the data correctly.

Regime Transitions

Markets don't announce regime changes. Transitions often occur:

Into High Volatility

1. VIX rises through 20
2. GEX turns negative
3. Realized vol exceeds implied
4. Vanna flows accelerate

Back to Low Volatility

1. VIX declines, term structure normalizes
2. GEX turns positive
3. IV catches up to (lower) realized vol
4. Charm flows become more predictable

These transitions can be gradual (weeks) or sudden (days).

Trading Strategy Implications

Regime	What Works	What Doesn't
Low Vol	Selling premium, mean reversion	Buying volatility, breakouts
Normal	Balanced approaches	Extreme positioning
High Vol	Trend following, buying vol	Short volatility, fading moves
Crisis	Capital preservation, hedges	Most strategies struggle

Regime Persistence

Volatility regimes exhibit clustering—high vol follows high vol, low vol follows low vol. This is well-documented in academic literature and has practical implications:

• Don't assume yesterday's low vol means today will be calm
• High vol regimes tend to persist but eventually mean-revert
• Regime changes are relatively rare but significant events

VannaCharm and Regime Context

Our exposure metrics should be interpreted through a regime lens:

• In low vol: Charm flows may be the primary driver; expect pinning behavior
• In high vol: Vanna flows dominate; watch for feedback loops
• At transitions: Exposure profiles shift rapidly; stay alert

The raw numbers mean different things in different contexts.

Related Concepts

• Gamma Exposure (GEX) - Key regime indicator
• Vanna Exposure (VEX) - Dominates in high vol regimes
• Negative Gamma Environment - Common in high vol
• Positive Gamma Environment - Common in low vol