Saturday, January 07, 2006
Marketz : Implied Volatility Skews in the QQQQs
More information on the skews and their interpretation can be found in this earlier post.
What we see now in the QQQQs (at 42.68 as of 01/06/2006) is that at equidistant strikes, the implied volatility of puts is uniformly larger than the IV of calls. In the event of there being no market bias, the skew is 1.0 since calls and puts at equidistant strikes cost the same. Now, the skew close to the spot price is between 0.9 and 0.95. The market is pricing in a small but significant bias that stock prices are headed lower.Does that mean the market will go lower ? Not necessarily. Traders can fade this bias by buying the cheaper options(the calls) and selling the more expensive ones (the puts).
Over the last few weeks, this bias has been faded. On Dec 19th, calls were more expensive than puts. The ensuing week saw a decline in the QQQQs. Last week, puts were more expensive than calls- QQQQs rallied impressively.
Therefore, considering the trend of the past few weeks, I think the volatility pricing is slightly bullish.
Technorati Tags : Marketz Volatility Skews Options Analysis QQQQs Calls Puts Market Direction Trends
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Sort of curious what SW you use in your IV analysis. Is it freeware available someplace on the net or your own making. I've been looking for something I can use against the Q's, Diamonds, Semis and Spyders which is simple an easy to use.
My email is bdgross7@yahoo.com. Barry. Thanks
My email is bdgross7@yahoo.com. Barry. Thanks
Sort of curious what SW you use in your IV analysis. Is it freeware available someplace on the net or your own making. I've been looking for something I can use against the Q's, Diamonds, Semis and Spyders which is simple an easy to use.
My email is bdgross7@yahoo.com. Barry. Thanks
My email is bdgross7@yahoo.com. Barry. Thanks
Larry McMillan's book on options suggests that puts generally have a higher premium since 1987 for 'protection' on index funds, while some commodities do not (e.g. grains, which have a certain minimum price).
I really haven't studied it. Some volatility traders use this type of analysis to great advantage, although I suspect that without doing it both repeatedly and in size that the advantage declines.
Best,
Ron
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I really haven't studied it. Some volatility traders use this type of analysis to great advantage, although I suspect that without doing it both repeatedly and in size that the advantage declines.
Best,
Ron
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