17 lines
1.1 KiB
Plaintext
17 lines
1.1 KiB
Plaintext
The Rush and the Crush
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In this situation, volatility rises before and falls after a widely anticipated
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news announcement, of earnings, for instance, or of a Food and Drug
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Administration (FDA) approval. In this situation, option buyers rush in and
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bid up IV. The more uncertainty—the more demand for insurance—the
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higher vol rises. When the event finally occurs and the move takes place or
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doesn’t, volatility gets crushed. The crush occurs when volatility falls very
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sharply—sometimes 10 points, 20 points, or more—in minutes. Traders
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with large vega positions appreciate the appropriateness of the term crush
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all too well. Volatility traders also affectionately refer to this sudden drop in
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IV by saying that volatility has gotten “whacked.”
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In order to have a feel for whether implied volatility is high or low for a
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particular stock, you need to know where it’s been. It’s helpful to have an
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idea of where realized volatility is and has been, too. To be sure, one
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analysis cannot be entirely separate from the other. Studying both implied
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and realized volatility and how they relate is essential to seeing the big
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picture. |