Tag Archive | "implied volatility"

VXST, VIX, VXV, and the rest of the curve

Friday, October 11, 2013

1 Comment

Rises in VIX and implied volatility in general tend to attract the attention of business reporters and other market watchers who do not usually follow options markets all that closely. I’ve seen several mentions recently, for instance, of the ratio of VIX to VXV as an indication of market stress, and some readers have asked whether I planned to write about this ratio sometime soon. The short answer is that I’ve been writing about VIX:VXV all along. The ratio of…

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…

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,…

Yen Term Structure At Multi-Year Extremes

Thursday, April 11, 2013


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…

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…

Nikkei implied volatility rallies along with stocks

Monday, February 11, 2013

1 Comment

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…

Just How Inexpensive are Options Getting?

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…

S&P 500 3-month implied volatility is extremely low

Tuesday, August 21, 2012

1 Comment

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…

Something Strange is Happening to Treasury Bond Options

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…

Volatility Analysis: The Next Step in Trading

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…


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


Open All | Close All