Did Stock Market Volatility Just Peak?

Posted On March 31, 2020 2:48 pm
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

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.