Tag Archive | "options"

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

Friday, October 11, 2013

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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…

Why Black-Scholes is Better Than We Think

Thursday, December 6, 2012


Every options trader knows about or at least of the Black-Scholes-Merton (BSM) pricing model. Because it is the oldest formalized pricing model and only the first of many, some traders regard it as outdated and inferior. Perhaps it is a victim of the familiarity that breeds contempt. But a recent paper gives some reasons why traders should give BSM a second look. Delta hedging is an essential component of any volatility trading strategy. When straddle buyers also buy…

SPX Options Yawn as Correlations Increase

Tuesday, June 12, 2012


Here are some observations about volatility and market conditions. 1. Option implied volatility is not especially high. With all the noise in the markets, you might think that options prices have baked in a lot of downside risk. They haven’t. One month SPX historical volatility is about 18%, and one month at the money implied volatility is closer to 20%. If we add in out of the money skew, VIX-style, we get an estimate of 23.5%. That ratio of implied to historical –…

A Quantitative Look at Volatility Skew

Thursday, March 15, 2012


Implied volatility (IV) skew is one of the most important and interesting aspects of listed options. IV skew typically refers to the differences in the implied volatilities of options in the same expiration cycle with different strike prices. There have been many attempts in the academic literature to model the behavior of changes in skew, but the interpretation of skew information by traders is still done largely on a qualitative and ad hoc basis. In “Quantifiable Implied Volatility Skew,”

The Problem with Volatility Skew, and Why You Should Care

Friday, February 24, 2012


The jargon of options trading sometimes turns people off, and maybe “volatility skew” is one of the biggest hurdles. So I’m going to explain the concept in a straightforward way, and then explain why volatility skew is something you should care very much about. Volatility skew usually refers to the difference between the implied volatilities of options at different strike prices in the same expiration cycle. For the majority of stocks and indexes, options with high strike prices have low…

What Options Are Good For

Thursday, September 8, 2011


Risking capital is like making a statement in a language. In a natural language like English or French, asserting some proposition puts you at risk of being right or wrong. If you say true things over and over, people will respect you more; if you constantly assert obvious falsehoods, no one will take you seriously. In the language of financial assets, expressing some view means risking your financial capital instead of your social capital: if your financial assertion is wrong,…

New eBook Short: Options and the Volatility Risk Premium

Tuesday, March 1, 2011


I’m excited to announce the publication of Options and the Volatility Risk Premium, a short eBook (about 4500 words) published by FT Press. I have written about the volatility risk premium (VRP) before on this blog, and published a feature article in Expiring Monthly last year on the presence of the VRP in commodity options. The first part of the text explains the concept of the volatility risk premium and gives a rationale…

Implied Volatility May Be Higher Than It Appears

Thursday, November 4, 2010


Several clients mentioned the sizable decline in implied volatility yesterday and characterized current levels of IV as too low to sell. I think I can sympathize with that intuition – after all, we’re closing in on the lowest levels seen since May, and 18% IV won’t strike most volatility traders as an obvious selling opportunity. To get a snapshot of the current level, let’s take the average of the eight nearest to the money strikes in December SPX options, as…

Q3 2010 Condor Options Performance Review

Monday, October 18, 2010


In addition to the regular performance data, I have a couple of interesting items to comment on for this quarterly review. First: for anyone who thinks that global equity markets may have some choppy periods ahead, this is an excellent opportunity to start thinking seriously about the role non-directional strategies should play in your portfolio. Second: we’ve added a dynamic delta hedging component to the newsletter to improve the purity of our volatility trading and to reduce unwanted…

Delta, Like Everything, Decays

Monday, October 4, 2010


Standard accounts of the option Greeks will explain that delta measures the rate of change in the price of an option per unit change in the underlying asset. The text I use with mentoring clients, Natenberg’s Option Volatility and Pricing, provides some additional helpful ways of thinking about delta: as a ratio of underlying contracts to options required to establish a neutral position, e.g. for every five 40-delta calls purchased, two underlying contracts (or two hundred shares of…


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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