8. Realized Volatility Falls, Implied
Volatility Remains Constant
This volatility shift can be marked by a volatility convergence, divergence,
or crossover. Exhibit 14.9 shows the realized volatility falling from around
30 percent to about 23 percent while IV hovers around 25. The crossover
here occurs around the middle of February.
EXHIBIT 14.9 Realized volatility falls, implied volatility remains constant.
Source : Chart courtesy of iVolatility.com
The relative size of this volatility change makes the interpretation of the
chart difficult. The last half of September saw around a 15 percent decline
in realized volatility. The middle of October saw a one-day jump in realized
of about 15 points. Historical volatility has had several dynamic moves that
were larger and more abrupt than the seven-point decline over this six-week
period. This smaller move in realized volatility is not necessarily an
indication of a volatility event. It could reflect some complacency in the
market. It could indicate a slow period with less trading, or it could simply
be a natural contraction in the ebb and flow of volatility causing the
calculation of recent stock-price fluctuations to wane.
What is important in this interpretation is how the options market is
reacting to the change in the volatility of the stock—where the rubber hits