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Highlights from the CBOE Risk Management Conference

Monday, March 24, 2014

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The annual CBOE Risk Management Conference was held last week in Bonita Springs, FL, and it was a great opportunity to meet some old friends, make new acquaintances, and hear from some industry...

The Volatility Research Gap

Monday, September 23, 2013


Information provided by the options market is the least accessible of the sources available to investors. Even though changes in the volatility surfaces of assets have been shown in the literature to provide valuable signals about future returns, the analysis of volatility is still seen as a specialist area. I have been working on a research product designed to help fill this gap, and more details about that are coming shortly, but first I think it would be helpful to…

Two recent publications: volatility of volatility and put-call ratios

Monday, September 16, 2013

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I wrote two articles this summer for Active Trader magazine. My article in the June 2013 issue, “Trading on uncertainty: Timing the volatility of volatility” explains the concept of the volatility of volatility with a portfolio return thought experiment, and then presents some hypothetical strategy returns using a basic volvol indicator, the standard deviation of daily changes in option implied volatility. I also look at the returns to a strategy that is short constant maturity one month VIX straddles,…

Volatility trading within the limits of arbitrage?

Monday, August 26, 2013


Some market inefficiencies are not easily exploitable. Sometimes, large inefficiencies become popular enough that the activity of arbitrageurs makes them into small inefficiencies. And sometimes small inefficiencies are small enough that it is not profitable for participants to arbitrage them away. Clients ask sometimes whether strategies designed to exploit the volatility risk premium (VRP) would still be profitable after accounting for transaction costs. This is one way of asking whether the presumed market inefficiency is large enough to be exploitable. To…

A Long Term Look at the S&P 500 Volatility Risk Premium

Monday, August 12, 2013


Some clients here and readers on Twitter asked for a long-term look at the relationship between the  historical volatility of the S&P 500 and the implied volatility of SPX options. The chart below shows those two time series since 1986, using a one month estimate for historical vol and the VXO index for implied vol.* All of the charts below can be enlarged with a click. The statistic in which most traders are interested is the difference between those…

Volatility as an Accidental Asset

Monday, July 8, 2013


BlackRock is receiving some attention today for two recently published reports, both of which focus on the idea of volatility as a distinct asset class. This is already a well-explored idea: to give just two examples, Nelken 2007 was the first book-length treatment, and I did a survey of some of the academic literature in my 2011 essay. But as Sears explains, as the world’s largest asset manager, BlackRock obviously has a bigger megaphone with which to…

Stressed term structures in bonds, stocks, and real estate

Friday, June 21, 2013


It’s absolutely nuts that implied volatility has exploded higher on such a small decline from recent highs. In the attached video, I explain this week’s selloff by looking at term structure changes in TLT, SPX, and IYR. Note in particular the divergence between IYR and the S&P 500. Flatter term structure in option implied vol is one of the most meaningful indicators of changes in sentiment, because especially for longer-dated comparisons, it takes a lot more to move the…

What the S&P 500 term structure said

Monday, June 10, 2013


In equity markets, a selloff doesn’t really count until it gets the term structure up. For instance, here’s the ratio of SPY 3 month implied volatility to one year implied volatility since 2012: The only two occasions when we got close to backwardation here were in May 2012 and the end of December 2012 (fiscal cliff). In 2013, the mean level has been about 0.83, which just means that 3 month SPY options were typically about 83% as expensive,…

Volatility Clustering with Bobcat Goldthwait

Thursday, May 9, 2013


Russell Rhoads draws a great analogy between volatility spikes and a famous incident in show business history: On May 6, 1994 Robert Francis Goldthwait made his mark on television history.  Better known as Bobcat Goldthwait, he chose for some strange reason to set fire to the interview chair during a guest appearance on the Tonight Show.  This incident lasted only 30 seconds or so as Jay Leno used his beverage to douse the flames.  I think what Bobcat…

Research and the real world: a naked straddle story

Monday, April 8, 2013


Research is essential. Without it, it’s difficult to tell whether you aren’t just trading noise. Practical experience is essential, too. Without it, it’s difficult to find the limitations of your research. Here’s a story that played out in my mind last week. None of these are thoughts that haven’t been thought or written about extensively before, but the juxtaposition of a G-d’s eye view of markets with a minute-level look makes the point pretty well, I think. First, some research…

Three reasons equity calls are historically inexpensive

Monday, March 25, 2013


Call options on individual stocks are more attractive now than at any time since 2004, and that holds true independently of any directional market view. The three reasons upside calls are inexpensive are that interest rates remain low, out of the money call implied volatility is low, and index implied correlation remains relatively high. That’s the argument of Deutsche Bank’s Rocky Fishman in a note earlier this month. The confluence of the first two factors is shown nicely in the…


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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