17 lines
1.1 KiB
Plaintext
17 lines
1.1 KiB
Plaintext
Implied Volatility and Direction
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Who’s afraid of falling stock prices? Logically, declining stocks cause
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concern for investors in general. There is confirmation of that statement in
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the options market. Just look at IV. With most stocks and indexes, there is
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an inverse relationship between IV and the underlying price. Exhibit 3.2
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shows the SPX plotted against its 30-day IV, or the VIX.
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EXHIBIT 3.2 SPX vs. 30-day IV (VIX).
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The heavier line is the SPX, and the lighter line is the VIX. Note that as
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the price of SPX rises, the VIX tends to decline and vice versa. When the
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market declines, the demand for options tends to increase. Investors hedge
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by buying puts. Traders speculate on momentum by buying puts and
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speculate on a turnaround by buying calls. When the market moves higher,
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investors tend to sell their protection back and write covered calls or cash-
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secured puts. Option speculators initiate option-selling strategies. There is
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less fear when the market is rallying.
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This inverse relationship of IV to the price of the underlying is not unique
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to the SPX; it applies to most individual stocks as well. When a stock |