33 lines
2.1 KiB
Plaintext
33 lines
2.1 KiB
Plaintext
are a few observations to be made that can help a trader make better-
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educated decisions about IV.
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Reversion to the Mean
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The IVs of the options on many stocks and indexes tend to trade in a range
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unique to those option classes. This is referred to as the mean—or average
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—volatility level. Some securities will have smaller mean IV ranges than
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others. The range being observed should be established for a period long
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enough to confirm that it is a typical IV for the security, not just a
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temporary anomaly. Traders should study IV over the most recent 6-month
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period. When IV has changed significantly during that period, a 12-month
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study may be necessary. Deviations from this range, either above or below
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the established mean range, will occur from time to time. When following a
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breakout from the established range, it is common for IV to revert back to
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its normal range. This is commonly called reversion to the mean among
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volatility watchers.
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The challenge is recognizing when things change and when they stay the
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same. If the fundamentals of the stock change in such a way as to give the
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options market reason to believe the stock will now be more or less volatile
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on an ongoing basis than it typically has been in the recent past, the IV may
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not revert to the mean. Instead, a new mean volatility level may be
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established.
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When considering the likelihood of whether IV will revert to recent levels
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after it has deviated or find a new range, the time horizon and changes in
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the marketplace must be taken into account. For example, between 1998
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and 2003 the mean volatility level of the SPX was around 20 percent to 30
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percent. By the latter half of 2006, the mean IV was in the range of 10
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percent to 13 percent. The difference was that between 1998 and 2003 was
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the buildup of “the tech bubble,” as it was called by the financial media.
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Market volatility ultimately leveled off in 2003.
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In a later era, between the fall of 2010 and late summer of 2011 SPX
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implied volatility settled in to trade mostly between 12 and 20 percent. But
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in August 2011, as the European debt crisis heated up, a new, more volatile
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range between 24 and 40 percent reigned for some time. |