We have seen an impressive contraction in implied volatility (IV) as the market has retraced most of the year’s sell-off but is this IV normalizing and reverting to the mean or has it contracted more than it should? It’s important information for premium sellers.
A 1 year chart of the VIX was displayed. The chart showed that the average VIX price since 2000 has been 21 and the average since 2015 has been 18. The VIX is currently trading below both the 16- and 1-year average VIX levels. The current IV percentile is 50%.
A table of the percentage of days the VIX was above the current level of 17 and the percentage of days was below the current level since 2000 and also since 2015 was displayed. The table showed that we are currently trading below both the 16 and 1 year averages.
Since the peak last month, the average daily contractions were approx. 4%; right in line with the average contraction. Please note, the numbers are in percentages, not basis points, so.a contraction of the VIX from 40 to 36 would be a 10% contraction.
A table of the average amount of time for a 5 percentage move in the VIX over 1-month intervals was displayed. The table included the number of days for a 5% expansion and a 5% contraction. Since last month’s peak volatility has had a total contraction of 33% over the whole month. Lukasz noted, “When we have higher volatility we do look for that opportunity because on average when volatility reaches those extremes it seems to contract a lot quicker.”
Watch this segment of Options Jive” with Tony Battista, Pete Mulmat and special guest Lukasz from the research team for the valuable takeaways and a better understanding of how implied volatility moves and changes.
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