4. Realized Volatility Remains Constant,
Implied Volatility Rises
Exhibit 14.5 shows that the stock is moving at about the same volatility
from the beginning of June to the end of July. But during that time, option
premiums are rising to higher levels. This is an atypical chart pattern. If this
was a period leading up to an anticipated event, like earnings, one would
anticipate realized volatility falling as the market entered a wait-and-see
mode. But, instead, statistical volatility stays the same. This chart pattern
may indicate a potential volatility-selling opportunity. If there is no news or
reason for IV to have risen, it may simply be high tide in the normal ebb
and flow of volatility.
EXHIBIT 14.5 Realized volatility remains constant, implied volatility
rises.
Source : Chart courtesy of iVolatility.com
In this example, the historical volatility oscillates between 20 and 24 for
nearly two months (the beginning of June through the end of July) as IV
rises from 24 to over 30. The stock price is less volatile than option prices
indicate. If there is no news to be dug up on the stock to lead one to believe
there is a valid reason for the IV’s trading at such a level, this could be an
opportunity to sell IV 5 to 10 points higher than the stock volatility. The