23 lines
1.6 KiB
Plaintext
23 lines
1.6 KiB
Plaintext
point at which these lines meet is an indication that IV may be beginning to
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get cheap.
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First, it’s a potentially beneficial opportunity to buy a lower volatility than
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that at which the stock is actually moving. The gamma/theta ratio would be
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favorable to gamma scalpers in this case, because the lower cost of options
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compared with stock fluctuations could lead to gamma profits. Second, with
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IV at 35 at the first crossover on this chart, IV is dipping down into the
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lower part of its four-month range. One can make the case that it is getting
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cheaper from a historical IV standpoint. There is arguably an edge from the
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perspective of IV to realized volatility and IV to historical IV. This is an
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example of buying value in the context of volatility.
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Furthermore, if the actual stock volatility is rising, it’s reasonable to
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believe that IV may rise, too. In hindsight we see that this did indeed occur
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in Exhibit 14.4 , despite the fact that realized volatility declined.
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The example circled on the right-hand side of the chart shows IV
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declining sharply while realized volatility rises sharply. This is an example
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of the typical volatility crush as a result of an earnings report. This would
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probably have been a good trade for long volatility traders—even those
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buying at the top. A trader buying options delta neutral the day before
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earnings are announced in this example would likely lose about 10 points of
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vega but would have a good chance to more than make up for that loss on
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positive gamma. Realized volatility nearly doubled, from around 28 percent
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to about 53 percent, in a single day. |