The Iran War has caused so much global turmoil that the news is moving markets. Realized volatility can help you understand those movements.
Anyone paying attention to the news has noticed that markets are moving quickly in response to the war. Just a few words, like “The war is about over” and “We are going to be actively bombing for a few more weeks,” are roiling markets and stressing investors and traders of all levels.
You can’t trade the news in an environment like this, nor can you predict the trend direction. There really isn’t a trend; just a chopfest.
But you can get a handle on market movements by comparing realized volatility versus implied volatility.
What is realized volatility?
Realized volatility measure the level of volatility we are actually experiencing.
The volatility indicator (VIX), one of my favorite indicators, represents implied volatility, or the expected level of volatility for 30 days in the S&P 500.
Realized and implied volatility are priced very differently; implied is usually priced at a higher level than realized. It makes sense, because the future is unknown. No one has a crystal ball to predict exactly what is going to happen in the next 30 days.
How this affects options trading
Options are priced based on implied volatility, while realized volatility can help explain movements in a stock or index. And when the markets are moving based on real-time news flow, like they are now, realized volatility, which is usually sitting at very low levels, starts to climb.
Current realized volatility is 13% and rising. Implied volatility is 25% and rising. Because realized volatility is usually MUCH lower than 13%, this tells us two things:
- Markets are expecting and getting big moves
- Options are getting more expensive
As one options trader to another, here’s my advice: Lay low.
Until the Iran War concludes and global economies stabilize, sit on cash and keep some index puts working to protect your portfolio from wild market swings. Even without the war, we are in a seasonally choppy period. Don’t let the chop devastate your wealth.
10-day series for beginners
