Archive | Volatility

U.S. Market Risk Dashboard Update – No Warnings Signs, Yet

Tuesday, April 8, 2014


Given the fierce market selloff in recent sessions, I thought it would be helpful to check on our favored set of risk indicators for the U.S. market.

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…

Do the Commitments of VIX Futures Traders Predict the Future?

Monday, July 22, 2013


Not really. Here are the 2013 weekly non-commercial VIX futures Commitments of Traders (COT) from the CFTC: There are interesting stories in the time series – especially the large run-up in net short exposure in 2012 and 2013, which was unwound pretty quickly in June and has slowly started to climb again. Charts below show percent changes in the spot VIX index one, two, and four weeks after each change in the non-commerical short VX COT. Data are from…

The Post-Crisis Data Point

Monday, July 15, 2013


After the financial crisis, there were fewer asset classes that people were willing to describe as diversifiers. They were/are: “managed futures,” which generally just means long/short commodity trend-following; fixed income, but really just U.S. Treasury bonds and notes; option implied volatility. More on that last item in a moment. The notion of commodities being treated as a separate asset class has always seemed a little strange. It’s not as though commodities are sui generis economic Robinsons Crusoe. Many of…

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…

How a friendlier Germany might affect options markets

Tuesday, May 28, 2013


An article published in Der Spiegel on Monday is causing quite a stir for its suggestion of a policy about-face by Germany. Angela Merkel and Wolfgang Schäuble have been viewed since the banking crisis began as inflexible and uninformed for their pursuit of fiscal austerity in the face of a balance-sheet recession. Now, it looks like domestic political heat may be causing the German fiscal ice to thaw. To come to grips with the problem, Merkel and Schäuble…

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…

Is the market reducing long-term volatility expectations?

Wednesday, May 1, 2013


In response to my earlier post on why options markets are being overly sensitive, Eli Mintz offered an interesting alternative explanation of the data:  @condoroptions My interpretation is more benign. I think that the market is just pricing lower average volatility long term. — Eli Mintz (@VixCentral) April 30, 2013 Here’s why this is a plausible explanation of those recent flattening periods in the VX slope. If the market is expecting lower volatility over the long term,…

Options markets are being overly sensitive

Tuesday, April 30, 2013


One of the most important market signals over the last five years has been the slope of the VIX futures term structure. In quiet, bullish markets, short term option premiums are significantly lower than longer-dated implied volatility; when risk scenarios roil markets, the term structure flattens and then steepens in the other direction. Changes in that dynamic have more explanatory power than many of the technical signals and chart patterns favored by directional traders. Since December 2012, however, changes in the…

Extreme correlation between equity returns and implied volatility

Tuesday, March 26, 2013

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Everyone knows that implied volatility and stock returns tend to be negatively correlated. The results from a recent study we did showed, though, that when implied volatility and stock returns become too negatively correlated, volatility sellers should consider moving to cash. The x axis in fig. 1 shows the two month realized correlation of VXX and SPX returns. The y axis shows VXX returns 15 days after each correlation observation. One thing that stands out from this plot is that, if we…

How should you compare implied volatility across assets?

Monday, March 11, 2013


Most traders understand that a “buy low, sell high” approach applies to options markets just as well as it does anywhere else: when options are overvalued, it pays to be a net seller of that premium. But “overvalued” often has nothing to do with the level of implied volatility you might observe on a chart. Options are usually well-bid for a reason, or are cheaply priced for a reason. Finding an asset where volatility is truly under- or overvalued depends…

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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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