The AAPL vol being bid up is a fallacy in the implied vol model that outputs an average realized vol number, when in fact the market is saving that the non earnings days are lower vol than the earnings days. The implied vol going up is a reflection of the fact that you are incorrectly modeling your theta decay. That's why if you buy aapl vol and sell it before earnings you don't make a ton of vega pnl.
Yes. Could not have said it better for the effects of earning announcement or other major events on IV. The entire probability density b/f expiration is compressed into two up-dn branches of a one-period binomial tree.
This is so obvious I am wondering if you guys have futures quotes on VIX. Vol as synthetic time as like three guys are going to buying "physical" vol (not var futures) in SPX into the holiday and a defined uptrend. It's absent a bid. >300bp on cash in two days reflects the entire vol-trading community crowding into the holiday trade. I will bet any amount that cash VIX rallies on Tuesday. My guess would be at least 70bp.
Atticus, If option expires within a few days of EA, the IV is the mkt expected size of binomial movement of stock in response to the news. You can model it in terms of jumps. I was not following $VIX or VIX Index on Esignal. I follow VX F2-CF (Jan) and VX G2-CF (Feb) contracts as well as VXX. I think I now understand Maverick's point now. The Jan and Feb future will settle on the indx level at expiration, which in turn is based on the option contracts 30 days later after the expiration. So in that sense both front and 2nd month futures do not really cover holiday periods. Am I missing sth? njrookie
Maverick, I do not understand the analogy to AAPL EA. For apple, everyone knows there will be news and waited. So the vol is condensed and then evaporated after announcement. For SPX, everyone knows there will be a holiday and trading will be slow. There is no news/surprises. The transition should be smooth. Why vol dropped first and then went up just before christmas. Still look for an answer ... %%%%%%%%%%%%%%% Seasonality DOES matter. The VIX got discounted to reflect that. Markets adjust very fast today. The VIX does not have to drop 15 days in a row to account for the seasonality factor. It can do it in 2 days. Case in point, AAPL vol gets bid into earnings. Earnings come out as expected. What happens to AAPL vol? It doesn't bleed out slowly over the next 3 weeks. It's bleeds out fast in like the first 5 minutes of trading!!!!! %%%%%%%%%%%%%%%
If it were because of holiday realized vol then the 60 day atm vol would not substantially change from dec 7 to today. If it's a supply demand imbalance it would. It could be a supply demand imbalance. It also could be real. But the fact is that risk premiums have come in. Whether they stay low or not is another matter.
It can be estimated using two maturities, and generally the estimates are slightly rich to actual (as your would expect). Of course there are many times when the market gets it wrong as well.
I don't really understand what you are saying here. Are you saying that no one is buying listed vol into the holiday, so that's why vol is coming in. I agree that I wouldn't be reading into the vol selloff as the end of the problems. I think the vol markets and the cash markets are dislocated right now.