Term structure
How implied volatility changes across expirations. When the short dates run above the long ones, the market expects an immediate scare.
In the chapter
What is really being bought and sold
From the same chapter
- Implied volatilityThe move the contract's price takes for granted between now and expiry. It is not a forecast: it is what you would have to believe for that price to be fair.
- Realised volatilityHow much the underlying ACTUALLY moved. Comparing realised with implied is the central question for an option seller: is the expectation expensive?
- IV RankWhere today's implied volatility sits within its range over the last year, from 0 to 100. It tells you rich or cheap FOR THAT asset, not in absolute terms.
- IV PercentileWhat share of days in the last year had lower implied volatility than today. More robust than rank when there has been an isolated spike.
- Volatility skewFar puts trading at higher implied volatility than equivalent calls. It is the price of fear: falling scares more than rising.
- Volatility smileThe curve implied volatility traces across strikes. If it were flat the model would be enough; that it is not is what has to be interpreted.
- Volatility crushThe sharp drop in implied volatility right after a scheduled event. It explains how you can call an earnings move correctly and still lose.
- VIXThe index summarising 30-day implied volatility on the S&P 500. It rises when the market pays up for protection, so it usually moves opposite to the index.