point at which these lines meet is an indication that IV may be beginning to
get cheap.
First, it’s a potentially beneficial opportunity to buy a lower volatility than
that at which the stock is actually moving. The gamma/theta ratio would be
favorable to gamma scalpers in this case, because the lower cost of options
compared with stock fluctuations could lead to gamma profits. Second, with
IV at 35 at the first crossover on this chart, IV is dipping down into the
lower part of its four-month range. One can make the case that it is getting
cheaper from a historical IV standpoint. There is arguably an edge from the
perspective of IV to realized volatility and IV to historical IV. This is an
example of buying value in the context of volatility.
Furthermore, if the actual stock volatility is rising, it’s reasonable to
believe that IV may rise, too. In hindsight we see that this did indeed occur
in Exhibit 14.4 , despite the fact that realized volatility declined.
The example circled on the right-hand side of the chart shows IV
declining sharply while realized volatility rises sharply. This is an example
of the typical volatility crush as a result of an earnings report. This would
probably have been a good trade for long volatility traders—even those
buying at the top. A trader buying options delta neutral the day before
earnings are announced in this example would likely lose about 10 points of
vega but would have a good chance to more than make up for that loss on
positive gamma. Realized volatility nearly doubled, from around 28 percent
to about 53 percent, in a single day.