1. Realized Volatility Rises, Implied
Volatility Rises
The first volatility chart pattern is that in which both IV and realized
volatility rise. In general, this kind of volatility chart can line up three ways:
implied can rise more than realized volatility; realized can rise more than
implied; or they can both rise by about the same amount. The chart below
shows implied volatility rising at a faster rate than realized vol. The general
theme in this case is that the stock’s price movement has been getting more
volatile, and the option prices imply even higher volatility in the future.
This specific type of volatility chart pattern is commonly seen in active
stocks with a lot of news. Stocks du jour, like some Internet stocks during
the tech bubble of the late 1990s, story stocks like Apple (AAPL) around
the release of the iPhone in 2007, have rising volatilities, with the IV
outpacing the realized volatility. Sometimes individual stocks and even
broad market indexes and exchange-traded funds (ETFs) see this pattern,
when the market is declining rapidly, like in the summer of 2011.
A delta-neutral long-volatility position bought at the beginning of May,
according to Exhibit 14.1 , would likely have produced a winner. IV took
off, and there were sure to be plenty of opportunities to profit from gamma
with realized volatility gaining strength through June and July.
EXHIBIT 14.1 Realized volatility rises, implied volatility rises.
Source : Chart courtesy of iVolatility.com