20 lines
1.3 KiB
Plaintext
20 lines
1.3 KiB
Plaintext
9. Realized Volatility Falls, Implied
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Volatility Falls
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This final volatility-chart permutation incorporates a fall of both realized
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and IV. The chart in Exhibit 14.10 clearly represents the slow culmination
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of a highly volatile period. This setup often coincides with news of some
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scary event’s being resolved—a law suit settled, unpopular upper
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management leaving, rumors found to be false, a happy ending to political
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issues domestically or abroad, for example. After a sharp sell-off in IV,
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from 75 to 55, in late October, marking the end of a period of great
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uncertainty, the stock volatility began a steady decline, from the low 50s to
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below 25. IV fell as well, although it remained a bit higher for several
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months.
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EXHIBIT 14.10 Realized volatility falls, implied volatility falls.
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Source : Chart courtesy of iVolatility.com
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In some situations where an extended period of extreme volatility appears
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to be coming to an end, there can be some predictability in how IV will
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react. To be sure, no one knows what the future holds, but when volatility
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starts to wane because a specific issue that was causing gyrations in the
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stock price is resolved, it is common, and intuitive, for IV to fall with the
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stock volatility. This is another type of example of reversion to the mean. |