Liz and Jenny invite James from the research team in for their weekly segment recapping recent research.
Today they discuss a recent Market Measures on expected moves.
Is there an advantage to trading a different index in place of the S&P, such as the Dow, Russell or Nasdaq?
Just as the SPX has the VIX, the other indices have their own volatility indicator. NDX, RUT and $DJI have VXN, RVX and VXD. Given the price and IV of any underlying, a trader can calculate the expected move for a specified period of time by multiplying the price by the IV by the result of the square root of the days to expiration (DTE) divided by 365. Our study took the data from January 2004 to the present for SPX and VIX, NDX and VXN, RUT and RVX and $DJI and VXD. We then calculated the 45 day expected move for each index on a daily basis resulting in more than 3100 observations per index. We then noted how often each index stayed within the expected move and what the actual move was as a percentage of the expected move.
The Russell and Nasdaq tend to have the highest volatilities, all tend to track one another. Theory tells us to expect prices to fall within the price expectation 68% of the time (i.e. within 1 Standard Deviation). Our results told us that prices fall within the expected more than expected. This is why we sell option premium. A table displayed the expected percentage inside of the implied move and the actual percentage inside of the implied move over 45 days for the 4 main indexes. A second table showed for each index what the actual move was in terms of the expected move when it was inside the expected range, outside the expected range and the average.
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