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Volatility Tracker for January 19, 2010

Tuesday, January 19, 2010

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Volatility Tracker for January 19, 2010 Last week, I noted the very wide spread between short-term realized and implied volatilities. Although the selloff on Friday alleviated conditions slightly, [5] the spread is still large enough that traders inclined to be net sellers of options need not fear occasional daily increases in realized volatility. [6] The smartest trade in equity index options at this point might be to sell the wings and buy the guts on a dollar-neutral basis, delta-hedging…

Volatility Tracker for the Week of January 10, 2010

Monday, January 11, 2010

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Volatility Tracker for the Week of January 10, 2010 The continuing rally in equities has resulted in some remarkable volatility readings. 21-day realized volatility in the S&P 500 closed below 10% on Friday [5], and the spread between 21-day realized volatility and spot implied volatility 30 (calendar) days ago is wider than at any time in 2009.[6] While option implied volatility regularly tends to run higher than the realized volatility in the underlying, current readings are extreme. Since equity…

Volatility Tracker: Stock-Picking Might Matter

Monday, November 16, 2009

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Volatility Tracker for the week of November 16, 2009 Equity index options are about as evenly priced as they’ve been in some time [5,6], but another continuation of the intermediate-term rally would mean more disappointment for option buyers, especially those who entered new positions in early November. The ratio of short-and long-term (Jan 2010 vs. Jan 2011) implied correlation is getting noisier, but is also challenging its lows for the year. At the Volatility Trading Summit earlier this month, several…

Volatility Tracker: Reversion to the Trend

Monday, November 9, 2009

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Volatility Tracker for the week of November 8, 2009 I wondered last week whether we would see a return to the reflation rally or were entering a new regime dominated by mean reversion. The price action last week counts in favor of both, as we reverted to the closing highs of the prior week; I expect a more definitive answer by November options expiration. The sale of out of the money equity index puts and/or put spreads I suggested last…

Volatility Tracker: Gold Hysteria

Monday, October 26, 2009

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Volatility Tracker for the week of October 26, 2009 As I’ve noted on many occasions here, the relationship between spot VIX and longer-dated VIX estimates has not “worked” as a directional indicator for at least several months. [7,8] This looks like a genuine puzzle: the premium VIX futures traders are willing to pay and/or requiring in order to sell is too steep and has been too persistent to be dismissed as a phenomenon typical of the “wall of worry” that…

Volatility Tracker: Overpaying for Options

Monday, September 28, 2009

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Volatility Tracker for the week of September 28, 2009 The spread between the volatility realized in the S&P 500 over the last 30 calendar days and the volatility implied in S&P 500 options 30 calendar days ago is about the widest that it has been  this year, with the exception of a similar instance in early August. [5,6] That means stocks haven’t been nearly as volatile as index option prices have assumed they would be. Put another way, it has…

Volatility Tracker: Implied Correlation as a Reflation Proxy

Monday, August 31, 2009

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Volatility Tracker for the week of August 31, 2009 The CBOE Implied Correlation Index spiked to its highest level last week since the beginning of the rally that began this spring. [10] In a healthy, normally functioning market, companies that succeed will see their stock prices rise, while the stocks of failing companies will fall. In a healthy, normally functioning market, the stocks of winners and losers alike won’t rise or fall together in lock step; but the increase in…

Should Market-Neutral Options Traders Diversify?

Monday, August 31, 2009

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We generally restrict iron condor trades in our paid newsletter and managed accounts to index products. For those who prefer ETFs, we look at SPY, DIA, IWM, QQQQ; otherwise, SPX, RUT, NDX, DJX are bigger proxies, or on the futures side of things we’ll look at the Emini S&P 500 or Nasdaq 100 (ES and NQ). The reason we trade index products is that diversification reduces the impact of company-level surprises: an iron condor on, say, RIMM will get…

Volatility Tracker: Skewed Returns

Sunday, August 23, 2009

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Volatility Tracker for the week of August 24, 2009 ‘Reflation’ is the name of the conceptual cure for the cognitive dissonance experienced by any rational observer of this market. Equities returned to short-term overbought status this week [4] and options are relatively fairly priced [6]. At 16%, the 21-day realized volatility of the S&P 500 is as low as it’s been  since the financial crisis began, though it would be folly to try to call a bottom in volatility, or…

Volatility Tracker: Shorting the Conventional Wisdom

Sunday, August 16, 2009

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Volatility Tracker for the week of August 17, 2009 Conventionally, equity prices and implied volatility are inversely correlated, meaning that traders who expect a price decline should be net buyers of options. But as long as the ratio of lagged implied and realized volatility remains this high, [5,6] it makes sense to be a net seller of equity index options, even alongside the expectation of a modest price decline. Regarding index prices, I would only mention that an “overbought” condition…

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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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