OptionSellers.com talks Commodities Market Volatility with Jack Walker of ivolatility.com
OptionSellers.com’s Michael Gross sits down with Ivolatility.com’s Jack Walker on volatility, commodities and opportunities for investors in 2016
OS – Welcome Jack and thanks for talking to us today. While you and I know each other, our readers don’t. Can you tell them a little bit about yourself and who you are?
JW: Sure. I’m author of the IVolatility Trading Digest, a weekly online commentary about using options to define and limit market risk. We offer financial market analysis from an options perspective.
I have quite a bit of long/short equities expertise using options in combination with a trend following discipline. This was developed over many years incorporating my proprietary Momentum Adjusted Portfolio Allocation (MAPA) ™ & Mostly Neutral ™ a risk management technique.
As a global macro-economist, my industry experience includes managing offshore hedge funds, mutual funds, leveraged fixed income, equity funds and being a market maker on the Pacific Exchange.
OS – That is an impressive resume. Can you tell our readers a little bit about ivolatility.com and what they offer to investors?
JW: Absolutely. We provide real time volatility measures along with other important data for option traders. We show them options volatility data arranged and displayed in a manner that creates predictive qualities while providing the best volatility charts in the business. OS – I know you guys do some great work over there. As our readers probably know, we used several of your graphs in the newest edition of The Complete Guide to Option Selling. Jack, we’ve seen volatility increasing in many commodities as of late ie: crude oil, gold……What do you attribute that to?
OS – I know you guys do some great work over there. As our readers probably know, we used several of your graphs in the newest edition of The Complete Guide to Option Selling. Jack, we’ve seen volatility increasing in many commodities as of late ie: crude oil, gold……What do you attribute that to?
JW: There are two common measures of volatility; the first relates to the past price movements of the underlying asset. This is referred to as Historical Volatility (HV) also known as Statistical Volatility (SV) or Realized Volatility. The second is Implied Volatility (IV). Implied volatility is a value derived by an options pricing model like the Black-Scholes. Using the current price of the underlying security, the exercise price, time to expiration, interest rates, and dividends when applicable, they compute implied volatility values for each option based upon actual market prices.
As prices for an underlying commodity decline, both volatility measures increase. This is because there is a tendency for prices to decline faster than they advance. This in turn, increases the Historical Volatility. When this happens, it increases the options Implied Volatility reflecting the uncertainty or the width of the possible stock price distribution for any give period.
As for crude oil and gold, the volatility measures have been rising as their prices have declined.
OS – Do you see commodities market volatility increasing or decreasing into Q1 2016? What are your views on stock market volatility into that same period?
JW: I think that since commodities prices are generally priced in dollars, the direction of our currency is playing an important role. Should the dollar resume advancing, downward commodity price pressure will resume and volatility will rise. Inversely, should the dollar decline further from current levels commodity prices should stabilize and volatility will decline.
OS – Jack, as you know, most of our readers either sell options or are interested in selling options. Are there any key tools or indicators you would recommend in helping them gauge the best times to sell premium?
JW: Since higher implied volatility equates to higher premiums, this is usually considered favorable to the option seller. Comparing the Historical Volatility to the Implied Volatility will often help determine if option prices are “expensive” or “cheap.” In our experience, the caution light begins flashing when the IV/HV ratio exceeds 2.0. We suggest using volatility charts to see these relationships over longer periods, and consider the volatility relationships for those with seasonal tendencies.
OS – Your website attracts a global audience made up of all types of option traders. In your years of serving this audience, are there any particular viewpoints or opinions you’ve developed in regard to buying vs. selling options?
JW: Due to implied volatility skew in the equity market, out of-the-money puts are typically expensive in implied volatility terms while calls are inexpensive. This gives put selling an implied volatility edge, but also comes with the risk of assignment. If you’re trading stocks, that should be incorporated into your trading plan.
OS – Thank you for your insights Jack. We hope you’ll come back and talk with us again in the future!
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