Start with the first, volatility.
The implied volatility in the put contract example is 35%, while the implied volatility in the call contract example is 34%.
What that does for the volatility is it suppresses the volatility, so the volatility has been cheap in relation to the rest of the market," he said.
And so what happens there is of a direct consequence to us and I think it translates exactly through volatility; volatility in the prices of the commodities and products that we export, and volatility in our currencies, even in our stock market.
Volatility has virus-like properties.
The VIX, or volatility index, is the best-known gauge for it.
When volatility surges above that level, investors sell shares and hold more cash.
The danger, then, is that a sudden pickup in volatility could result in speculators suffering losses.
These jitters are most easily observed in VIX futures, derivatives that measure the level of volatility in stocks.
The authors write: “On average, extremely low volatility today predicts low volatility in the future, not higher.”
The implied volatility in the put contract example is 34%, while the implied volatility in the call contract example is 33%.
The implied volatility in the put contract example is 33%, while the implied volatility in the call contract example is 30%.
The Chicago Board Options Exchange volatility index, or VIX, a measure of stockmarket volatility calculated using S&P 500 options prices, is at its lowest since early 2007.
"Even though market volatility can sometimes be extreme, investing on a longer time horizon is the best strategy, as the market has a tendency to move higher and volatility dampens.
Analyst comment: "Put spreads are particularly attractive when the implied volatility used to price deep out-of-the-money (OTM) puts is significantly higher compared to the implied volatility of higher-strike puts.
If they're hedging with options with the view that volatility will stay low or fall, a surge in volatility requires them to sell the underlying asset and rehedge to maintain that targeted level of volatility.
Of course, bear markets shouldn’t be expected to sustain volatility at quite this extreme level, but compared to the recent bull market it’s pretty normal to expect volatility to remain elevated until the stock market regains a more positive trajectory.
Institutional capital markets: Traditional capital markets firms (institutional brokers, exchanges, clearing firms) are benefiting from the current elevated volatility, though runaway volatility for an extended period could have the opposite effect of freezing up trading.
With elevated volatility in sight, the volatility risk premium, which measures the spread or differential in price between implied (forward-looking) and realized (historical) stock market volatility, has the potential to remain attractive in 2021, in Jilek's view.
He continued: "We use the selling of S&P 500 options as a hedge to our market exposure rather than an outright bet on volatility...The higher implied volatility is and the more spread there is between implied and realized volatility, the more effective our hedge is going to be."
volatility
noun attribute
- the property of changing readily from a solid or liquid to a vapor
noun attribute
- the trait of being unpredictably irresolute
Example: the volatility of the market drove many investors away
noun attribute
- being easily excited
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