35 lines
2.4 KiB
Plaintext
35 lines
2.4 KiB
Plaintext
the road. The market’s apparent assessment of future volatility is unchanged
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during this period. When IV rises or falls, vol traders must look to the
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underlying stock for a reason. The options market reacts to stock volatility,
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not the other way around.
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Finding fundamental or technical reasons for surges in volatility is easier
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than finding specific reasons for a decline in volatility. When volatility falls,
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it is usually the result of a lack of news, leading to less price action. In this
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example, probably nothing happened in the market. Consequently, the stock
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volatility drifted lower. But it fell below the lowest IV level seen for the six-
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month period leading up to the crossover. It was probably hard to take a
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confident stance in volatility immediately following the crossover. It is
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difficult to justify selling volatility when the implied is so cheap compared
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with its historic levels. And it can be hard to justify buying volatility when
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the options are priced above the stock volatility.
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The two-week period before the realized line moved beneath the implied
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line deserves closer study. With the IV four or five points lower than the
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realized volatility in late January, traders may have been tempted to buy
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volatility. In hindsight, this trade might have been profitable, but there was
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surely no guarantee of this. Success would have been greatly contingent on
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how the traders managed their deltas, and how well they adapted as realized
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volatility fell.
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During the first half of this period, the stock volatility remained above
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implied. For an experienced delta-neutral trader, scalping gamma was likely
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easy money. With the oscillations in stock price, the biggest gamma-
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scalping risk would have been to cover too soon and miss out on
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opportunities to take bigger profits.
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Using the one-day standard deviation based on IV (described in Chapter
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3) might have produced early covering for long-gamma traders. Why?
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Because in late January, the standard deviation derived from IV was lower
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than the actual standard deviation of the stock being traded. In the latter half
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of the period being studied, the end of February on this chart, using the one-
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day standard deviation based on IV would have produced scalping that was
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too late. This would have led to many missed opportunities.
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Traders entering hedges at regular nominal intervals—every $0.50, for
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example—would probably have needed to decrease the interval as volatility |