Tag Archive | "volatility risk premium"

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…

Q4 2012 Condor Options Performance Review

Tuesday, January 15, 2013


The Condor Options newsletter portfolio returned 21% in 2012, versus 17% for the S&P 500. The strategy also beat the S&P 500 in the final quarter of the year, giving back 1.1% versus the SPX loss of 2.05%. We also bested the CBOE Volatility Arbitrage Index (VTY) for the year by about 3 percentage points. The purpose of the strategy is to profit from the volatility risk premia that are priced into options. While the volatility risk premium is a consistently…

The market is as nervous as ever about austerity fetishism

Monday, January 7, 2013


In a recent note, Goldman Sachs economist Alec Phillips wonders whether the market is becoming less sensitive to political brinksmanship: (via Business Insider) The chart shows the level of VIX in the run-up to the 2011 debt ceiling and 2012 fiscal cliff deadlines. Phillips’s question implies that since VIX was actually lower throughout December 2012, it may be that the market is, in Joe Weisenthal’s phrase, developing an immunity to Washington. The first problem with this comparison is that…

Why Taleb is Wrong About Markets and Uncertainty

Monday, November 26, 2012


Once you cut through the layers of purple prose and elective neologism, Nassim Nicholas Taleb’s central thesis is not hard to understand: people often know less than they think that they do, and some human affairs are arranged so that they are negatively, neutrally, or positively affected by surprising events. His prior work has focused on large, unlikely risks – cases where agents who think they are neutrally oriented or robust to surprises are actually fragile when the unexpected happens.…

Preparing for the Fiscal Cliff Debate

Wednesday, September 5, 2012

1 Comment

The approaching U.S. fiscal cliff has been on the radar of every strategist and portfolio manager since the compromise was reached in 2011. If policymakers are not able to amend the current mix of changes, mandated spending and benefit cuts and the expiration of several tax cuts will create a significant drag on the economy. A recent overview from Goldman Sachs makes clear just how much is at stake. If no changes are made to current law, the contraction in…

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…

Is the threat of airstrikes against Iran driving oil options prices higher?

Sunday, March 25, 2012

1 Comment

Probably. First, some context. Here’s the one-month volatility risk premium in USO options since 2007. Think of this as an estimate of how richly or cheaply priced options on crude oil are, relative to the actual historical volatility of the asset. Any ratio above 1.00 indicates that option buyers were willing to pay a premium above the value of the volatility subsequently exhibited by crude oil futures. As you can see, the ratio is usually greater than one.…

The Cost of Hedging Equity Exposure Is Higher Than It Looks

Saturday, March 17, 2012


BofA interest rate strategists Ralph Axel and Ruslan Bikbov suggest that now would be a good time to buy tail risk hedges. (hat tip Joe Weisenthal) 6-month options on 10-year swap futures are as inexpensive now, they claim, as they’ve been in decades, excluding one period in 2006. 6M IV on 10Y Swap Futures, bp. Source: BofA Merrill Lynch Global Research So far, so good. If rates are your key concern, this looks like a decent time to…

Appearance on Abnormal Returns TV

Tuesday, March 29, 2011


I really enjoyed chatting with Tadas Viskanta of Abnormal Returns last week. In the video below we discuss VIX whipsaws, the Japan VIX, the volatility risk premium, and the ubiquity of black swan talk. I’m still getting messages from people who visited the Amazon link and were disappointed because they didn’t own a Kindle. Take heart, gentle reader! You can buy a regular PDF copy from FT Press.


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