trade: you’re in for a wild ride. The lines on this chart scream volatility.
This means that negative-gamma traders had better be good and had better
be right!
In this situation, hedgers and speculators in the market are buying option
volatility of 50 percent, while the stock is moving at 35 percent volatility.
Traders putting on a delta-neutral volatility-selling strategy are taking the
stance that this stock will not continue increasing in volatility as indicated
by option prices; specifically, it will move at less than 50 percent volatility
—hopefully a lot less. They are taking the stance that the market’s
expectations are wrong.
Instead of realized and implied volatility both trending higher, sometimes
there is a sharp jump in one or the other. When this happens, it could be an
indication of a specific event that has occurred (realized volatility) or news
suddenly released of an expected event yet to come (implied volatility). A
sharp temporary increase in IV is called a spike, because of its pointy shape
on the chart. A one-day surge in realized volatility, on the other hand, is not
so much a volatility spike as it is a realized volatility mesa. Realized
volatility mesas are shown in Exhibit 14.2 .
EXHIBIT 14.2 Volatility mesas.
Source : Chart courtesy of iVolatility.com
The patterns formed by the gray line in the circled areas of the chart
shown below are the result of typical one-day surges in realized volatility.