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International Expected Moves vs Actual Moves

Know Your Options

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

We love trading the S&P 500 ETF (SPY) because of its very liquid options markets. And we love selling premium on this product because we have seen a good amount of historical overstatement in SPY’s movement relative to the expected move derived from its implied volatility. However, SPY is not the only equity ETF that has a liquid options market. Today we are looking at non-US stock indices that have liquid options markets: International Developed Markets (EFA), Emerging Markets (EEM), China Large Cap (FXI), and Brazil (EWZ). Have they also witnessed similar overstatement in IV?

The Study

We used the price changes in the stock ETFs and in their coinciding volatility products to check how often actual moves stayed inside expected moves:

  • 2011 to present
  • EFA, EEM, FXI, and EWZ
  • VXEFA, VXEEM, VXFXI, and VXEWZ
  • Used IV indices to price 45-day expected moves and compared to actual moves
The Results

We saw that all of these non-US stock markets saw overstatement greater than the expected 68.3% of the time, with EFA and EEM exhibiting the most overstatement. Check out the segment above for more details.

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