By: Steve Smith
The two watchwords over the past month have been “unprecedented” and “volatility,” often with both used together. And indeed, volatility did, in fact, hit both unprecedented levels. But, the questions now are whether it peaked and what can we expect going forward?
To answer those questions, we first need to set the table in terms of what we mean by volatility and where it has been. The first item to understand is that the VIX is a statistic which uses a formula of combining a variety of strikes and expiration dates to measure the constant maturity 30-day implied volatility given SPX options or the “SPDR 500 (SPY)” proxy.
The second item is to understand that implied volatility gauges what the options market expects in terms of price to happen in the future while historical or realized volatility is a measure of what price actually did over a given time period. The third item to understand is that both IV and HV tend to be mean-reverting. Meaning over time these measures will tend to track each other.
Under normal circumstances, implied volatility will be higher than historical volatility because most people have more confidence about what will happen tomorrow or next week than what might happen three months or a year from now. But the recent price action — and yes, unprecedented volatility — have caused HV to trade and a large premium to IV as the spread continues to persist.
Over the past 21 trading days, SPY hit a high of 102% which reflects the fact that… Continue reading at StockNews.com