22 lines
1.4 KiB
Plaintext
22 lines
1.4 KiB
Plaintext
trade: you’re in for a wild ride. The lines on this chart scream volatility.
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This means that negative-gamma traders had better be good and had better
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be right!
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In this situation, hedgers and speculators in the market are buying option
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volatility of 50 percent, while the stock is moving at 35 percent volatility.
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Traders putting on a delta-neutral volatility-selling strategy are taking the
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stance that this stock will not continue increasing in volatility as indicated
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by option prices; specifically, it will move at less than 50 percent volatility
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—hopefully a lot less. They are taking the stance that the market’s
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expectations are wrong.
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Instead of realized and implied volatility both trending higher, sometimes
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there is a sharp jump in one or the other. When this happens, it could be an
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indication of a specific event that has occurred (realized volatility) or news
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suddenly released of an expected event yet to come (implied volatility). A
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sharp temporary increase in IV is called a spike, because of its pointy shape
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on the chart. A one-day surge in realized volatility, on the other hand, is not
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so much a volatility spike as it is a realized volatility mesa. Realized
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volatility mesas are shown in Exhibit 14.2 .
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EXHIBIT 14.2 Volatility mesas.
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Source : Chart courtesy of iVolatility.com
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The patterns formed by the gray line in the circled areas of the chart
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shown below are the result of typical one-day surges in realized volatility. |