These days, it seems like every corner of the market in Japan is unusual in some way or other. We’ve recently looked at implied volatility skew in USDJPY and at the high realized correlation between the yen and Nikkei index. Another sign of how unusual the market is acting these days can be seen in the term structure of yen implied volatility. For reference, this is what implied vol in a currency normally looks like: FXE 2…
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…
Monday, February 11, 2013
Japanese stocks have been on a tear since last November. The Nikkei 225 index is up nearly 25%. Most of the time, stock returns and option implied volatility move in opposite directions. Since 2007, the correlation of daily S&P 500 returns and the VIX was -0.768. The intuitive explanation for this relationship is that equity holders are less likely to raise their bids for options when stocks are stable or are rallying. Based on that relationship, and given the size…
Tuesday, September 18, 2012
Are you better off now than you were four years ago? What about one year ago? If you’re like most investors, your market sentiment has probably improved substantially. There are plenty of ways to measure investor sentiment – we could look simply at the run-up in stock prices, or use a more sophisticated metric like the level of implied correlation. In between those two estimates, we might also look at the implied volatility of stock options, measured as a percentage…
Tuesday, August 21, 2012
The sharp decline in market volatility has directed a lot of attention to low readings in the CBOE Volatility Index (VIX). Given all of the plausible scenarios for market turmoil not that far in the future, traders have been wondering: isn’t VIX at least a tad underpriced? Nicholas Colas from ConvergEx responds: In practice, the VIX measures expected changes in stock prices over the next 30 days. That’s it. It is heavily informed by recent actual volatility, as…
Monday, August 6, 2012
It looks like investors are willing to pay more for options exposure to Treasury bonds than they ever have before. It is a well-known fact that, across many different markets and consistently over time, options tend to be priced today at volatility levels greater than the actual statistical volatility that occurs in the underlying asset. This phenomenon is known as the volatility risk premium (VRP). Think of an investor who wants to hedge her stock portfolio and buys some puts on…
Monday, July 30, 2012
Every investment is an instance of a more general schema: Because of q, I believe that p, so I will risk some money to make a profit if p is true. The proposition p could be about anything: it could be about the value of a company, the yield of a crop, or the outcome of a football game. Every case in which you risk some capital in order to profit from a future event is composed of the two activities mentioned in that…
Friday, April 13, 2012
I gave an online seminar on Wednesday, April 11th on implied volatility skew in partnership with TheStreet’s Options Profits service, where I am also a contributor. It was a lot of fun, and we got some great questions from participants. If you missed the event, the link below will allow you to play back or download the full webinar. https://thestreetevents.webex.com/thestreetevents/lsr.php?AT=pb&SP=EC&rID=5088857&rKey=52967bc2198a8c00 Volatility Skew and its Impact to Options Trading-20120411 2101-1 April 11, 2012, 5:01 pm New York…
Monday, April 9, 2012
I’m giving a free webinar in partnership with TheStreet’s Options Profits service on Wednesday on option implied volatility skew. I’m going to review, quickly, what IV skew is, present the results of our recent study for Expiring Monthly, and work through some examples of how to use skew information in timing and structuring positions. When: Wednesday, April 11 Time: 5pm ET CLICK HERE to register for the webinar You will be able to pre-register but the presentation will not be live until…
Tuesday, March 20, 2012
The theory that volatility ETPs are somehow going to have adverse consequences on the market has been a popular theme for a month or two now at least. I’ve tried to show why this this idea doesn’t make sense twice; when it comes to zombie ideas, sometimes you have to just keep trying. If you want to claim that the increased volume in volatility ETPs is causing the VIX tail to wag the SPX dog, you owe the world the…
Jared Woodard is a registered commodity trading advisor who specializes in trading volatility as an asset class. With over a decade of experience trading options, futures ... Read More
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Thursday, April 11, 2013
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