24 lines
1.6 KiB
Plaintext
24 lines
1.6 KiB
Plaintext
2. Realized Volatility Rises, Implied
|
||
Volatility Remains Constant
|
||
This chart pattern can develop from a few different market conditions. One
|
||
scenario is a one-time unanticipated move in the underlying that is not
|
||
expected to affect future volatility. Once the news is priced into the stock,
|
||
there is no point in hedgers’ buying options for protection or speculators’
|
||
buying options for a leveraged bet. What has happened has happened.
|
||
There are other conditions that can cause this type of pattern to
|
||
materialize. In Exhibit 14.3 , the IV was trading around 25 for several
|
||
months, while the realized volatility was lagging. With hindsight, it makes
|
||
perfect sense that something had to give—either IV needed to fall to meet
|
||
realized, or realized would rise to meet market expectations. Here, indeed,
|
||
the latter materialized as realized volatility had a steady rise to and through
|
||
the 25 level in May. Implied, however remained constant.
|
||
EXHIBIT 14.3 Realized volatility rises, implied volatility remains
|
||
constant.
|
||
Source : Chart courtesy of iVolatility.com
|
||
Traders who were long volatility going into the May realized-vol rise
|
||
probably reaped some gamma benefits. But those who got in “too early,”
|
||
buying in January or February, would have suffered too great of theta losses
|
||
before gaining any significant profits from gamma. Time decay (theta) can
|
||
inflict a slow, painful death on an option buyer. By studying this chart in
|
||
hindsight, it is clear that options were priced too high for a gamma scalper
|
||
to have a fighting chance of covering the daily theta before the rise in May. |