Relationship between implied volatilities of different timeframes

Discussion in 'Options' started by mwahal, May 12, 2016.

  1. mwahal

    mwahal

    Hi

    I have a question about how do you interpret an equity price action or expectations when the IVs of options of different timeframes are moving in opposite direction.

    Say, you have 3 IVs, let's call it IV15, IV30 and IV90, each is IV of options expiring in 15, 30 and 90 days (IV calculated based on CBOE VIX white paper).

    Let's say both IV15 and IV90 are rising in comparison to IV30. So, if you plot the ratio of IV15/IV30 (Black line) and IV30/IV90 (Blue Line), you will see it moving in opposite direction, almost mirror image. The chart is attached.

    So we know that both 15 day and 90 day options are being given higher premium vs the 30 days. I am trying to wrap my head around what it really means and if there is an opportunity to be exploited.

    EDIT: IVs are for USO ETF for May 11th, 2016 (1min interval)

    upload_2016-5-12_18-5-33.png
     
    Last edited: May 12, 2016
  2. Not having any idea on the underlying, it could relate to some upcoming event. Else, volatility should be in contango, with slightly higher IV with greater time to expiration.
     
  3. mwahal

    mwahal

    The IVs are for USO ETF for May 11th, 2016 - 1min interval chart
     
  4. As another poster mentioned, this is normally what might happen when there event risk being priced. I suspect I might even have an idea of what this event might be, but I could be wrong.

    Can you give the specific expiration dates? Moreover, given you've said that black line is IV15/IV30 and blue line is IV30/IV90, isn't the correct interpretation that 30 day options volatility is relatively high, rather than what you have said?
     
  5. mwahal

    mwahal

    I think you are right, the IV30 is the one which is rising, making the iV15/30 fall and IV30/90 rise. The calculations were done on May 11th, 2016. The expiration dates are

    Exp Dates for computing IV15
    2016-05-20 9
    2016-05-27 16

    Exp Dates for computing IV30
    2016-06-10 30
    2016-06-17 37

    Exp Dates for computing IV90
    2016-07-15 65
    2016-08-19 100
     
  6. And, to confirm, the chart you have shown is intraday? Also, why two expiration dates for each?
     
  7. mwahal

    mwahal

    Yes, its 1 min bar chart for May 11th.
    Two expiration dates for each to derive a constant 15/30/90 day IV. But if the exp date happens to be exactly same as 15/30/90 then the second date is ignored. This is based on the vix whitepaper published by cboe https://www.cboe.com/micro/vix/vixwhite.pdf
     
  8. Ah, I see, this is the interpolated 15/30/90 day vol...

    If it's intraday, there's really nothing much meaningful I can tell you. I can easily imagine that one particular large(ish) flow can easily move the vols in a way that you're observing. I don't think I'd be able to offer you an explanation that's any deeper than that.
     
  9. mwahal

    mwahal

    Hi Martinghoul

    Thanks for your replies and keeping an interest in it. I found the same behavior on 12th also.

    This is for May 12th, 2016 (1min chart).

    upload_2016-5-13_7-39-35.png

    This is for May 10th
    upload_2016-5-13_7-41-0.png

    For comparison, here is similar chart for SPY for 15/30/90 IV (for May 11 and 12, 1min intraday). I do find the IV15 is quite volatile though, spl during the opening hours. The VXST (9day IV for SPX) also observes the same behavior

    upload_2016-5-13_7-43-14.png
     
  10. I am not really all that familiar with USO... Do options on it really trade frequently enough for you to be able to observe fluctuations that you show on the chart?
     
    #10     May 13, 2016