Market Measures

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Seasonal Volatility in Stocks and Natural Gas

Market Measures

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The idea of seasonality is one that equity traders do not often have to deal with. Movement in stocks is largely dictated by randomness, as we have shown several times. However, seasonality is ever-present in commodity markets like natural gas.

Today’s Market Measures both proves seasonality in natural gas while disproving this phenomenon’s existence in broad equity markets like the S&P 500. The study makes use of daily moves in S&P 500 futures versus natural gas futures to show the randomness of months with historically large average moves in stocks relative to natural gas observing especially large moves in the winter months.

The show concludes with a conversation on how this seasonality transfers to the options market and implied volatility (IV). Tom shows how options have already priced in the propensity for a larger move in the winter months with a much larger IV being exhibited in January and February than in the summer months. This translates to IV Rank’s relative uselessness in finding what is expensive or cheap in seasonal markets due to the inevitable rise in IVR to 100 whenever that seasonally volatile time of year comes around. Check out the segment above for further details concerning seasonality’s effect on daily moves and options prices.

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