5. Realized Volatility Remains Constant,
Implied Volatility Remains Constant
This volatility chart pattern shown in Exhibit 14.6 is typical of a boring,
run-of-the-mill stock with nothing happening in the news. But in this case,
no news might be good news.
EXHIBIT 14.6 Realized volatility remains constant, implied volatility
remains constant.
Source : Chart courtesy of iVolatility.com
Again, the gray is realized volatility and the black line is IV.
It’s common for IV to trade slightly above or below realized volatility for
extended periods of time in certain assets. In this example, the IV has traded
in the high teens from late January to late July. During that same time,
realized volatility has been in the low teens.
This is a prime environment for option sellers. From a gamma/theta
standpoint, the odds favor short-volatility traders. The gamma/theta ratio
provides an edge, setting the stage for theta profits to outweigh negative-
gamma scalping. Selling calls and buying stock delta neutral would be a
trade to look at in this situation. But even more basic strategies, such as
time spreads and iron condors, are appropriate to consider.