20 lines
1.3 KiB
Plaintext
20 lines
1.3 KiB
Plaintext
7. Realized Volatility Falls, Implied
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Volatility Rises
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This setup shown in Exhibit 14.8 should now be etched into the souls of
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anyone who has been reading up to this point. It is, of course, the picture of
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the classic IV rush that is often seen in stocks around earnings time. The
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more uncertain the earnings, the more pronounced this divergence can be.
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EXHIBIT 14.8 Realized volatility falls, implied volatility rises.
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Source : Chart courtesy of iVolatility.com
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Another classic vol divergence in which IV rises and realized vol falls
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occurs in a drug or biotech company when a Food and Drug Administration
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(FDA) decision on one of the company’s new drugs is imminent. This is
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especially true of smaller firms without big portfolios of drugs. These
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divergences can produce a huge implied–realized disparity of, in some
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cases, literally hundreds of volatility points leading up to the
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announcement.
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Although rising IV accompanied by falling realized volatility can be one
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of the most predictable patterns in trading, it is ironically one of the most
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difficult to trade. When the anticipated news breaks, the stock can and often
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will make a big directional move, and in that case, IV can and likely will
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get crushed. Vega and gamma work against each other in these situations, as |