20 lines
1.3 KiB
Plaintext
20 lines
1.3 KiB
Plaintext
6. Realized Volatility Remains Constant,
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Implied Volatility Falls
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Exhibit 14.7 shows two classic implied-realized convergences. From mid-
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September to early November, realized volatility stayed between 22 and 25.
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In mid-October the implied was around 33. Within the span of a few days,
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the implied vol collapsed to converge with the realized at about 22.
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EXHIBIT 14.7 Realized volatility remains constant, implied volatility falls.
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Source : Chart courtesy of iVolatility.com
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There can be many catalysts for such a drop in IV, but there is truly only
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one reason: arbitrage. Although it is common for a small difference between
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implied and realized volatility—1 to 3 points—to exist even for extended
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periods, bigger disparities, like the 7- to 10-point difference here cannot
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exist for that long without good reason.
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If, for example, IV always trades significantly above the realized
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volatility of a particular underlying, all rational market participants will sell
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options because they have a gamma/theta edge. This, in turn, forces options
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prices lower until volatility prices come into line and the arbitrage
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opportunity no longer exists.
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In Exhibit 14.7 , from mid-March to mid-May a similar convergence took
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place but over a longer period of time. These situations are often the result |