Traders who think that low volatility means that buying outright puts or calls is a good idea need to think again as is clearly demonstrated in this segment how low IV overstates the expected move just like high IV does. You need to watch this segment if you trade options.
A graph of actual volatility versus implied volatility (IV) from 1990 to present was displayed. The graph showed that implied volatility tends to overstate realized movements in the markets. This is one of the key reasons we believe in selling premium.
We especially like to sell premium when volatility is high. You might think that when volatility is low that the actual moves won’t be overstated by low IV. We believe in measurable results so we ran a study.
A study was conducted using the S&P 500 from 1990 to present. We examined the moves every 30-day period and compared the actual moves to the implied moves based on the VIX at the beginning of each 30-day period. Then we analyzed the results in different implied volatility (IV) environments.
A graph was displayed of the percentage inside VIX expected moves. The graph included all VIX levels, VIX below 20, VIX below 17.5 and VIX below 15. The graph showed that implied volatility tends to overstate realized movements in the markets even when IV is extremely low.
A table was displayed of the percentage the market moves were inside 30-day expected move. the table included all vix levels, VIX below 20, VIX below 17.5 and VIX below 15. The table showed that we tend to see 1 standard deviation moves (SD) 85% of the time which is greater than the 68% that is suggested by probability theory.
A second table of the historical 30-day SPX moves and VIX below 15, VIX 15-20, VIX 20-25 and VIX above 25 were displayed. The table included the average implied move, average actual move and average implied volatility minus the average actual implied volatility.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways, why we still don’t believe in selling premium in low IV environments despite this study and other important information about the actual realized movements in the S&P 500 versus the implied volatility movements in different IV levels.
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