Volatility Views 3: Root, Mean, Square
Week in Review: Slow and low? That’s the volatility understatement of the year. Ten-day realized vol is near two-year lows. Is this the eye of the hurricane or the calm after the storm? Implied vol really low, although IV ended up on the week in the S&P 500. Market doesn’t completely trust the low vol levels.
Strategy Session: Continuing last week’s discussion, we begin looking into logical errors when deriving volatility over discrete periods. The simple answer: Root-Mean-Square. Don walks us through the math, as well as the usefulness of this method when looking to hedge volatility exposure over a longer period of time. Cheap volatility and buying or selling premium? Mark and Don discuss their own thoughts on these two matters.
Crystal Ball: Yay…no government shutdown, which may actually put a damper on upcoming vol. However, if oil continues to rally, and indications of interest are rates rising, we’ll see increases in IV. Good news doesn’t rally market = warning sign. Upcoming numbers to watch: Retail sales; beige book; Michigan sentiment; PPI; CPI. GVZ: Gold vol index starts trading options at CBOE starting 4/12. When will oil and the broader market diverge?
Items of note:
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