Market Measures

Implied vs Actual IVs | Different Timespans

| Feb 6, 2015
Up Next
    Market Measures

    Implied vs Actual IVs | Different Timespans

    Feb 6, 2015

    Since Implied Volatilities can be used to calculate the market’s expected move of the S&P 500, we wanted to place some probabilities around how often the market actually falls within (or outside) these expectations. Typically, we will look to use the VIX in order to calculate the expected move for the next 30 days and have shown this to be a very accurate measure. We have also found that Implied Volatility is often overstated, and is one of the reasons that we are primarily premium sellers.

    We have also previously shown that there are a number of different volatility indices that can be used for different periods of time. These include a 9-day (1 week) index called VXST, a 3-month index called VXV and a 6-month index called VXMT. Since these indices are looking at different time periods, we can use these values for our calculations in order to get a more accurate representation of the expected move for our chosen duration. However, are these indices really more accurate?

    Today, Tom Sosnoff and Tony Battista look to see how often the actual move lies within the expected move predicted by the indices for the different time periods. The guys find out that while all of the indices overstated the actual move, the further out in time (VXV and VXMT) the more accurate the estimate was. This means that the longer duration indices overestimated the actual move more often. This is a large part of our trading strategy, so it’s important to know how reliable these calculations are.

    It’s also important to know why Implied Volatility generally tends to overstate actual volatility. Implied Volatility is sometimes called a “fear index” because it typically spikes when uncertainty occurs (meaning far more premium is built into the option’s price due to demand). Sellers of options take this risk from buyers (who are seeking safety) and would therefore expect to be compensated. Fear, however, is rarely rational – markets generally make understated price moves. This makes actual price moves less than the market’s expectations. This is another reason why longer-term time spans tend to be more accurate and shorter-term predictions have much more variance (i.e. they tend to be more volatile).

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

    More like this

    tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on

    tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

    tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

    tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

    © copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.