Hard to believe, but the first half of 2017 has already come and gone. From a trading perspective, volatility has been muted this year, but that doesn't mean there haven't been a few surprises.
Obviously, technology has been a strong sector in 2017 - stronger likely than many expected. And with healthcare a hot button topic in Washington DC, that sector has been choppier than Lake Superior on the day the Edmund Fitzgerald went down.
There's a good chance that most tastytraders were already following these storylines in 2017. The big question is if we applied this knowledge to our portfolios.
A recent episode of Options Jive took a close look at the first half of trading in 2017 from a volatility perspective. And in many ways, our qualitative understanding of the 2017 narrative very much followed the quantitative outcome.
On the show, the Options Jive team examined how often the 45-day move of some well-known indexes and sector ETFs stayed within their expected move (implied by the associated option prices).
As illustrated in the graphic below, our qualitative understanding of 2017 does very closely match the quantitative results:
According to the slide above, the realized volatility of technology, healthcare, and consumer staples sector ETFs have all been higher in 2017 than their historical average.
Given the developments in each of these sectors throughout 2017, this isn't likely a big surprise. The tech boom has certainly affected traditional brick-and-mortar retail, which includes the consumer staples group.
Interpreting the chart above, the technology sector ETF (XLK) has stayed within its expected move on average 80% of the time since 2005. However, in 2017, the XLK has only done so 61% of the time. Meaning the XLK has moved outside its expected move considerably more this year.
The numbers in the graphic show a similar trend in healthcare (XLV) and consumer staples (XLP).
On the other hand, the financial (XLF), consumer discretionary (XLY), industrial (XLI), and energy (XLE) sector ETFs have all stayed even further within their expected ranges than normal - as compared to historical averages.
The episode presents another slide (not pictured) that highlights how metals, currencies, and treasuries have acted much like this latter group, with symbols such as FXE, FXY, GLD, SLV, GDX, GDXJ, and TLT all well within their expected ranges for the first half of 2017.
At a high level, this information can be extremely useful in guiding portfolio strategy. Armed with this knowledge going forward, it's possible our future trading decisions may benefit.
For example, if you've been short premium in the technology sector so far this year, and it hasn't been working, this data may represent the evidence you needed to make a change. Or, if you've been producing a nice return using a short premium strategy in the energy sector thus far in 2017, this data may help you better understand why that's been working so well.
A critical aspect to trading volatility is staying on top of the narratives and data to ensure that we adjust our portfolios as necessary.
We hope you'll take the time to review the full episode of Options Jive featuring an extremely useful review of implied volatility trends during the first half of 2017 when your schedule allows.
If you have any questions regarding expected moves, or trading thus far in 2017, we hope you'll leave a message below or reach out directly at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.