Source: Condor Options
The volatility risk premium is measured here as the ratio of one month implied volatility and one month trailing realized volatility. A high (low) estimate indicates that options have been expensive (cheap) over the past month relative to the actual volatility exhibited by the underlying stock index. Past premium levels aren't necessarily indicative of future levels, as you can see in the time series charts, but volatility effects do tend to cluster and it's always helpful to know where options are the most and least expensive.
One wrinkle in any attempt to make comparisons like this is that some indexes exhibit much more volatility than others. Emerging market stocks, for example, tend to move more dramatically than equities in developed markets like the U.S. or France. Some of those differences are smoothed away by using ratios of each country's implied and historical volatility, but to make the comparison even better, we look at the percent rank of each ratio versus the last two years of observations.
Right now, the S&P 500 (SPX) ranks the highest out of the twelve countries in this group, while the S&P/ASX 200 (Australia) comes in last. With some important data releases still to come this week, it's likely we see a reversal lower in the level of SPX implied volatility relative to the movement in the underlying: an ill-received Fed comment or two could push stocks lower, sending realized volatility up even as the reduced short-term uncertainty means option IV declines; if the Fed day goes well and NFP comes in as expected, we could also see option premiums drop. We're positioned right now with bullish equity positions for the medium term and hedged for this week with a long SPX strangle.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits.
Jared can be followed on Twitter at twitter.com/CondorOptions.
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas