Bloomberg out with yet another gem of an options article.
Options traders are betting stock swings in the Standard & Poor’s 500 Index will decrease at the fastest rate since the aftermath of the market crash in 1987, a sign that equities may keep rallying.
The difference between the benchmark index’s historic volatility and a gauge of so-called implied volatility based on expected swings rose to the highest in 21 years, according to data compiled by Credit Suisse Group AG and Bloomberg. The gap widened as investors paid less to insure against price declines, sending the Chicago Board Options Exchange’s Three-Month Volatility Index lower.
Historical volatility must fall 25 percent to bring the measures into accord. The last time the difference was this wide, stocks climbed for two quarters, according to data compiled by Bloomberg. Declining volatility is usually bullish for equities because it shows growing investor confidence.
Where do they get these guys? This is an absolutely misleading comparison.
I can only assume he refers to the above graph, 90 day historical volatility (in blue) vs. 90 day implied volatility (yellow).
Historical volatility at it's best is a lagging indicator. It tells us the volatility of a stock/index over the past "x" days. If you go back 90 days right now, you include data from when stock volatility spiked enormously. It encompasses the entirety of the Fall blast.
90 day implied volatility tells us what the market expects for volatility over the next 90 days going forward.
I would argue first of all that 90 day HV is of questionable use in any environment, and utterly pointless in this particular setup. We already know what happened in the Fall. Just because you start both these names with "90 day" does not mean they should necessarily compare neatly to one another. They don't.
What does 90 day HV completely miss and 90 day options actually price in? The fact that realized stock volatility has already tanked from the highs. The below graphs show respectively 30 day HV and 10 day HV over the past 6 month's.
So when he says above "historical volatility must fall 25 percent to bring the measures into accord", he clearly must know that as the volatile readings from the Fall leave the calculation, HV will actually drop off a cliff unless we start seeing 8% moves again.
