A Return To Volatility
The indexes tracking the implied volatility of US and Australian share prices looked to be grinding down towards zero at the end of last year. The share prices themselves were rising steadily, and short volatility trades (selling volatility with the expectation it would head lower) were in vogue.
Implied volatility is negatively correlated with share price movement, so as share prices were heading higher, implied or expected volatility was heading lower. In this environment it looked like easy money to bet that things were going to continue lower – and many did take that bet, with Credit Suisse’s inverse VIX fund topping $2 billion.
However, such low volatility (the VIX was sitting at historically low levels) will always reverse – as the short volatility traders were about to find out.
On the 6th of February as US markets faced serious falls due to valuation concerns and an expectation of higher interest rates – Credit Suisse’s fund was down 93 percent.
The fund was promptly halted, but the spectacular events heralded a notable change in equity markets from that period onward; a return to volatility.
Since that incredible spike in volatility (which was likely exacerbated by traders closing short-volatility positions), equity markets have seen persistently higher volatility than has been seen in recent history.
This can be a good environment for certain options strategies – as implied or expected volatility is a large and important component of options pricing.
When volatility is high, doing credit strategies such as the Bull Put, Bear Call, and Iron Condor, can be quite attractive – because you will receive a relatively higher credit than you would receive in a low volatility environment.
During periods of high volatility – bought options and debit strategies are relatively more expensive – and you will therefore need a relatively greater degree of movement to profit these strategies if you enter when volatility is relatively high.
Our advisors are therefore on the lookout for plenty of credit spreads in the current market, and if you are interested don’t be afraid to give us a call on 03 8080 5795, or email us at firstname.lastname@example.org.
TradersCircle is one of Australia's leading stock market education firms, and runs one of the country's busiest options trading desks. Learn more at www.traderscircle.com.au.