Tuesday, September 05, 2006

Blog of the Week: Daily Options Report


Interesting interview with Kyle Rosen Rosen in this week's Barron's. His main point? Volatility is historically cheap.
We've seen how quickly risk can be repriced. We will see a lot more of that, and there will be some wild swings back and forth. But across the board, risk premiums have been taken down to almost zero.

In options, a simple historical analysis of reversion to the mean shows implied volatility has averaged around 20% in any rolling three-, five-, 10-, 15- and 20-year period since options have been trading. Now we are hovering around 12%, a 40% discount just to the average. Even if we get back to the average, a lot of money can be made trading volatility. As implied volatility has been coming down near all-time lows, actual volatility has been creeping up.

He's right; risk premium in options is effectively zero. We are priced to perfection.

Unfortunately, I am not so sure 20 is *fair* VIX any more, I suspect it is lower now. The last decade has seen historic improvement in...

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