Condor Options

Volatility Tracker for the week of January 25, 2010

Implied volatility exploded in equities last week as markets were ravaged to the tune of…four per cent? [2]

The term structure of implied volatility and the ratio of implied to realized volatility all moved back towards even, indicating how accustomed we had become to substantially overpriced options and contangoed VIX futures. [6,7,8] Implied volatility is now unsustainably high -unsustainable, that is, unless you expect two-thirds of trading days to begin making swings of more than 1.5%. The natural response from any options trader is to sell overpriced short-term options, and while we positioned clients that way on Friday, it is also advisable to keep some capital at hand in case the economic calendar this week contains a nasty surprise or two.

Index component implied correlation is making another attempt at new highs. [10]

Options on oil continue to look overpriced, although recent price action recommends owning gamma for the very short term. [16,17]?