The initial months of this year have been characterized by a low implied volatility (IV) environment in virtually all underlying securities. This milieu ended suddenly and abruptly on the recent "flash crash" and IV generally remains significantly elevated above its recent nadir.
In Roman mythology the god of beginnings and endings, Janus, is typically portrayed having two heads, each facing in opposite directions. His countenances are displayed in this manner so that he can observe the past as well as the future. The two types of option volatility, historical volatility and implied volatility, also reflect this dual perspective.
Options offer a number of unique advantages to the trader, but perhaps the single most attractive characteristic is the ability to control risk precisely and to do so with surgical precision. Much of this advantage derives from the ability to control positions equivalent to stock with far less capital commitment.
Over the last few weeks traders have experienced a sea change in the volatility environment of the market; we have gone from a milieu in which implied volatility (IV) was low and was perhaps establishing a new long term reality to the current state of accelerating IV in a wide range of underlyings.
"May you live in interesting times" is an ancient Chinese curse. The fact that the last week has seen neck snapping and unprecedented changes in volatility, I think we qualify for living in what these philosophers would consider to be interesting times.
Last Thursday will go down in the history of the market as one of the strangest days ever. For students of chaos, it was the perfect but infrequent opportunity to take notes.
One of the more difficult problems with which to deal for an options trader has historically been the broad bid-ask spreads quoted for options.
The recent massive oil spill that now threatens major wildlife areas along the Gulf Coast is a reminder of how "black swan" events can impact our lives in unforeseen and unforeseeable ways.
Confused about options terminology? Join the club.
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