What Happens When Stock Implied Volatility Outpaces the SPY

Option prices are surging for stocks but are comparatively subdued for the SPY. In the illustration below, I comparison the implied volatility (IV) of idiosyncratic stocks with the IV of the SPY (an ETF based connected the S&P 500 Index) utilizing play options that expire the pursuing week. Specifically, I calculated the mean IV of idiosyncratic stocks astatine the extremity of each week and compared it to the SPY IV.

The illustration beneath is color-coded, highlighting that implicit the past 10 weeks, the mean IV of idiosyncratic stocks has been astir 50% (blue), a historically precocious level. Meanwhile, the SPY mean IV has remained comparatively debased astatine astir 13.5% (orange). This has pushed the dispersed betwixt the 2 adjacent to 36% (black), the highest level successful my information dating backmost to 2016.

This is an absorbing situation, and this week I'll analyse the humanities information to spot what this has typically meant for the short-term options trading environment.

Weekly SPY Options vs. Individual Stocks 

We would usually expect IVs connected idiosyncratic stocks to correlate with IVs connected the SPY, and that's typically the case. However, determination are times erstwhile they diverge, arsenic they person now.

It makes consciousness if traders expect large moves from idiosyncratic stocks, but they expect the large moves successful some directions. That could effect successful small question from the wide index. In different words, the options marketplace is pricing successful large, but uncorrelated, moves successful idiosyncratic stocks.

Before examining however options person performed successful this environment, it helps to found a baseline. Since 2016, I person information connected astir 550 weeks of enactment returns. These are at-the-money options purchased astatine the extremity of each week and cashed retired astatine intrinsic worth the week pursuing their expiration date. The archetypal tables summarizes the returns for SPY options.

Over that period, SPY calls person averaged a instrumentality of 12% per trade, reflecting the market's bullish instrumentality since then. SPY puts lost, connected average, astir 15%, portion a straddle (buying some a telephone and put) mislaid an mean of 1.28% per week. The array besides shows the percent of winning trades, the percent that doubled, and the mean returns for winning and losing trades.

The 2nd array shows however options connected idiosyncratic stocks would person performed. Calls averaged a affirmative instrumentality of 3.1% and puts were negative, averaging a nonaccomplishment of 6.4%. Based connected these tables, I would accidental SPY options person performed amended than options connected the mean idiosyncratic stock. SPY calls had a higher mean return, and SPY straddles mislaid little wealth than straddles connected stocks.