Market Measures

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The Most Overstated Timeframe

Market Measures

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Tastytraders take advantage of fear by selling expensive options. The strategy has performed well historically because implied volatility tends to overstate actual volatility. Does this differ across timeframes? Implied volatility tends to increase further out in time due to the greater uncertainty, does realized volatility increase at the same rate?

The Study:
  • Used IV Indexes to Calculate Expected Moves and Compared Them to the Actual Moves in S&P 500.
  • Looked at Varying Times Frames:
    • 1 Week, 2 Weeks, 1 Month, 3 Months
  • S&P 500 (SPY)
  • 2004 to Present

In all timeframes fear is overstated with the actual moves staying within the expected moves. Additionally, as we increase the timeframe the expected move was overstated by a larger and larger degree. For example, on a 1-week period the average expected move was +/- 2.5% while the actual move was +/- 1.7%. On a 1-month period the average expected move was +/- 5.3% while the actual move was +/- 2.8%.

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