20 lines
1.3 KiB
Plaintext
20 lines
1.3 KiB
Plaintext
3. Realized Volatility Rises, Implied
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Volatility Falls
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This chart pattern can manifest itself in different ways. In this scenario, the
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stock is becoming more volatile, and options are becoming cheaper. This
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may seem an unusual occurrence, but as we can see in Exhibit 14.4 ,
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volatility sometimes plays out this way. This chart shows two different
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examples of realized vol rising while IV falls.
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EXHIBIT 14.4 Realized volatility rises, implied volatility falls.
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Source : Chart courtesy of iVolatility.com
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The first example, toward the left-hand side of the chart, shows realized
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volatility trending higher while IV is trending lower. Although
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fundamentals can often provide logical reasons for these volatility changes,
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sometimes they just can’t. Both implied and realized volatility are
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ultimately a function of the market. There is a normal oscillation to both of
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these figures. When there is no reason to be found for a volatility change, it
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might be an opportunity. The potential inefficiency of volatility pricing in
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the options market sometimes creates divergences such as this one that vol
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traders scour the market in search of.
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In this first example, after at least three months of IV’s trading marginally
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higher than realized volatility, the two lines converge and then cross. The |