Sunday, April 6, 2014

A study of market drop and volatility rise for the last 4 years

I've been curious about the market volatility changes in the last 4 years (2010 to 2014) since Super trader Karen started her naked option selling strategy around 2010. Today, I finally got a chance to chart the SPY and its implied volatility and performed a brief analysis. In particular, I'm interested to see if there is some kind of relationship between SPY fall percentage and its IV rise percentage.

So I picked a few times in the last 4 years that IV rose quickly as shown in the chart below and created a table to investigate the percentage changes of IV and SPY price. In 2010, the market had the steepest drop (about 17%) within one month time, causing SPY IV (VIX) to rise 220% (more than tripled) in the same period. We have not seen this type of change 3 years since that.

After 2010, we had seen SPY IV rising close to 100% in a couple of months occasionally except in the last Jan in which month the IV doubled within 1 month. But the absolute values of SPY IV ranged from 11 to 15 and 20 mostly since 2013. This is the challenging period for the Karen style option selling. She used a set of different rules in the period, including using Weekly call options of 14 days to expiration, etc.

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