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Market Measures

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IV Overstatement

Market Measures

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

Implied volatility overstatement is the concept that forward-looking price estimators "overestimate" the actual price movements that occur. In this segment, we are going to test in several assets, by how much has implied volatility overstated these moves. In the next segment, we are going to tell you what to do with this information.

Study
  • Look at a range of assets from 2018-2020
  • Measure how often IV overstated RV [1 SD, 30-day expected move range]
  • Measure the average number of points overstated in overstated markets and in all market environments

We find three things:

  • The majority of the time, IV overstated RV for all the stocks and ETFs tested
  • Major tech stocks tended to be overstated less often than lower volatility ETFs
  • ETFs are more consistently overstated relative to individual stocks, meaning that ETFs are less risky to premium sellers

In the next segment, we will talk about applicable strategy for both stocks and ETFs.

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