Volatility Tracker for the week of February 8, 2010
Except for a brief interlude in mid-November, equity index options haven’t been this fairly valued in about a year, meaning that realized volatility has more closely matched the volatility implied by options prices. [5,6]
The February VIX futures contract closed above the March price on Friday -something that hasn’t happened on a weekly basis in quite some time. [7] It’s important not to read too much into this, since the front month contract…
Volatility Tracker for the week of February 1, 2010
This week saw realized volatility rise to meet last week’s spike in implied levels, although as I mentioned those spot implied levels weren’t easily sustainable. [2] I’m not the world’s greatest proponent of technical analysis, but the price charts for equities and oil deserve a look. Failure to revert toward recent averages would be further confirmation of the ill health of this market. [4,15]
With a less than one-point range over the past…
Volatility Tracker for the week of January 25, 2010
Implied volatility exploded in equities last week as markets were ravaged to the tune of…four per cent? [2]
The term structure of implied volatility and the ratio of implied to realized volatility all moved back towards even, indicating how accustomed we had become to substantially overpriced options and contangoed VIX futures. [6,7,8] Implied volatility is now unsustainably high -unsustainable, that is, unless you expect two-thirds of trading days to begin making swings of…
A major story in late 2009 was the negative correlation between equities and the U.S. dollar. In the chart below, I show the correlation of the logarithmic daily price changes of the S&P 500 and the U.S. Dollar Index futures composite. It appears the attention has been well deserved: both the 3-month and 1-year rolling correlations are the lowest they’ve been in at least two decades.
No sooner than some investors began noticing the negative correlation, others started calling a bottom…
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 as needed:…
Monday, February 8, 2010
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