Volatility, leverage, and what the regulator banned

Three things individual investors find in their app that work rather differently from how they look. The second gets demonstrated with a four-line calculation you can reproduce yourself, and the third has had its advertising banned in Spain since 2023.

What the volatility surface is

From the earnings chapter you took away one idea: implied volatility is how much movement the market expects, backed out of option prices. The volatility surface is what appears when you calculate that number for every option on an asset at once, and what appears isn't what the theory predicted.

What the theory said

The classic option pricing model assumes an asset's volatility is a single number. If that were true, calculating implied volatility across every option on a stock — high strikes, low strikes, near expiries, far ones — would produce the same value throughout.

Drawn as a map, it would be a perfectly flat surface.

What gets observed

It isn't flat. It has two systematic deformations and both say something.

A smile or a smirk across strikes. Options protecting against large falls typically carry higher implied volatility than those betting on equivalent rises. Translated: the market pays more to protect against a collapse than to participate in a rally.

It's the asymmetry the earnings chapter mentioned when discussing how to read directional skew without trading options. Here it has its full name and explanation: it isn't that the market thinks prices will fall, it's that fear of a large drop is worth more than hope of an equivalent rise.

And a slope across expiries. Options expiring on different dates embed different expectations. An expiry falling after an earnings release is worth more than one falling before, even days apart.

Why this matters even if you don't trade options

Because the surface is visual proof that the distribution of prices isn't what the classic model assumes. If it were, it would be flat.

That deformation is the market saying, with money on the line, that large falls are more likely than a normal model predicts. Which is exactly the next session's subject, measured from another angle.

What implied volatility rank and percentile are

An implied volatility of 40% means nothing on its own. The implied volatility percentile turns it into something readable: is it high or low for this specific asset?

The problem it solves

It's the earnings chapter's problem with expected move. Forty percent implied volatility is extremely high for a utility and perfectly normal for a small biotech.

Without a reference specific to the asset, the absolute number informs nothing. And that reference isn't provided anywhere.

The two ways to calculate it

Rank compares against the past year's extremes. If implied volatility has swung between 20% and 60% over twelve months and today sits at 40%, the rank is 50%: exactly midway between its low and its high.

Percentile compares against every day, not just the extremes. An 80% percentile means that on 80% of days in the past year, implied volatility sat below where it is today.

Percentile tends to be more useful, because rank gets distorted by a single extreme day. If there was one panic day with volatility at 60%, every other day's rank gets squashed toward the bottom.

What you read from this

A descriptive reading, not a signal: how much expected movement is priced in today compared to normal for this asset.

A very high percentile says the market expects considerably more movement than usual, and it usually coincides with something specific: earnings coming, a pending decision, litigation. A very low percentile says the opposite.

Neither says which direction. What they say is how exceptional each possible outcome would be, which is the same conclusion the earnings chapter's options session closed on.

Why a leveraged ETF decays over time

Here's the product most people buy without understanding what it promises. A leveraged ETF doesn't promise double the index's return: it promises double each day's return. Those are different things, and the difference accumulates.

The calculation, which you can reproduce

Picture an index rising 10% and falling 10% the next day. Repeated twice: four days, two rises and two falls.

	Start	End	Result
Index	100	98.01	−1.99%
2x ETF	100	92.16	−7.84%
3x ETF	100	82.81	−17.19%

The index lost 2%. The triple-leveraged one lost 17%. That isn't triple the index's loss: it's more than eight times.

The case that makes it even clearer

Now an index rising 10% and falling 9.09% the next day, which is exactly what it takes to return to the starting point.

	Result
Index	0.00% — back exactly where it began
2x ETF	−1.82%
3x ETF	−5.45%

The index ended where it started and the leveraged one lost money. Nobody did anything wrong and there was no hidden fee: it's the arithmetic of daily rebalancing.

Why it happens

Because the fund has to adjust its exposure at each session's close to deliver on its promise the next day.

After a rising day, the fund has more capital and needs more exposure, so it buys. After a falling day, it has less and needs less, so it sells. It buys after rising and sells after falling, every day, by design.

In a market rising in a straight line that works in its favour, and the result beats the simple multiple. In a market that oscillates, it works against. And the next session explains why markets oscillate more than most models assume.

The conclusion, prescribing nothing

The more the asset moves and the longer it's held, the larger the gap between what the product promises and what it delivers. That isn't an opinion on whether it suits anyone: it's a mathematical property of daily rebalancing, and it's in these products' prospectuses.

What is worth saying: anyone buying one believing it tracks the index multiplied has misunderstood the product, and the gap between what they think they hold and what they hold grows with each passing day.

Inverse ETFs have the same problem, and it surprises people more

An inverse ETF promises to move opposite its index: if the index falls 1%, the inverse rises 1%.

It carries exactly the same arithmetic, because it also rebalances daily. And it produces a particularly counterintuitive situation: an inverse ETF can lose money over a period in which its index fell. All it takes is for the fall not to have been in a straight line.

Anyone buying an inverse to "hedge" for a few months holds a position that does what they expect only if the move is fast and clean, and that erodes if the market falls in fits and starts — which is how markets usually fall.

And what the prospectus itself says

Recall from Chapter 1 that every company going public is required to publish its risks in writing. The same applies to these products, and it's worth noting.

A leveraged ETF's prospectus states it seeks a multiple of the daily return and warns that holding it longer than a day can produce different results. It's published, it's free, and it's written by whoever sells the product.

It's the same pattern the course's first session flagged with broker warnings: the information exists, it's mandatory, and it sits in a document almost nobody opens.

What CFDs are and what Spain's regulator has decided about them

This section is informational and regulatory. It doesn't explain how to trade these products or in what situations they might be used: it sets out what they are and what regulators have decided about them, which is what an individual investor needs to know.

What they are

A contract for difference is an agreement with an intermediary on the price difference of an asset between two moments. There's no purchase of the asset: you own nothing, collect no dividends, and hold no voting rights. There's a contract.

They're offered with leverage, meaning you control a position larger than the money deposited, with the consequences already covered in the risk chapter.

What Spain's regulator measured

The CNMV studied the actual outcomes of retail clients holding these products in Spain between January 1, 2015 and September 30, 2016.

82% of clients who traded them closed the period at a loss. In absolute terms: 30,656 clients lost €142 million, fees included.

These figures already appeared in the course's first session. They return here because this is where their full regulatory context belongs.

The European range

The CNMV's resolution of June 27, 2019, published in Spain's official gazette, cites the range documented by ESMA across European national authorities: between 74% and 89% of retail investors lose money trading these products.

That range is why the measures below exist.

The three regulatory decisions, in order

2018 — ESMA imposes leverage caps across the European Union. The maximums by asset class are the ones you saw in the risk chapter: 30:1 on major currencies, descending to 2:1 on crypto-assets.

2018 — Mandatory negative balance protection. A retail client can no longer end up owing the intermediary more than they deposited. Previously they could.

July 2023 — The CNMV bans advertising. The resolution of July 11, 2023, published in the official gazette, prohibits CFD advertising aimed at retail clients in Spain.

What it means for a regulator to ban advertising something

Worth pausing here, because it's uncommon and it says a fair amount.

Banning advertising for a legal product isn't a minor measure. It means the supervisor concluded that promoting these products among individuals caused harm that warnings weren't enough to prevent.

That's all the information needed. The course's first session already flagged the contradiction of an industry publishing the truth in small print next to an advert suggesting the opposite. Here is the institutional response to that contradiction, and it's the strongest a regulator can give short of pulling the product from the market.

What to remember

• The volatility surface isn't flat, and that deformation is the market pricing in that large falls are more likely than the classic model assumes.
• Implied volatility percentile turns an absolute number into something readable: whether it's high or low for that specific asset.
• A leveraged ETF promises a multiple of each day's return, not the period's: with an index ending flat, the triple-leveraged one loses 5.45%.
• In Spain, 82% of CFD clients closed at a loss per the CNMV, and advertising these products to retail clients has been banned since August 3, 2023.

Published August 3, 2026. Last reviewed: August 3, 2026.

Related: what "risk" really means · what the options market is saying before the announcement