Options Jive

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A Tale of Two Volatilities

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

It was the best of vols, it was the worst of vols…today’s show finds Tom and Tony comparing the two kinds of volatility: Implied and Realized. The boys cover what it means for Implied Volatility (IV) to overstate Realized Volatility (RV) in the stock market before heading on to more complex topics.

Using a running calculation of the spread between IV and RV, we found that, while IV does tend to trade on top of RV, there are large extremes at both ends of the spectrum. Looking at 2008 to the end of 2009 as a case study, we can see that when actual movement in the market is larger than that which is implied by options, there is an overcompensation by the options afterwards.

Check out what time thinks of these two metrics and where he sees the opportunity when using them.