Result of Tuesday's Selloff
TONIGHT! FREE Webinar: Volatility Skew with Jared Woodard Wednesday, April 11 at 5pm ET. CLICK HERE FOR INVITE AND TO REGISTER.
Tuesday's broad selloff caused three interesting things to happen in the market:
1) Option implied volatility spiked, increasing the spread over historical volatility across all the major equity indexes. The first attached chart plots the one month implied volatility of options on the Russell 2000 mini futures against the one month historical volatility of the futures themselves. CBOE Volatility Index (VIX) watchers, remember that there is a VIX-style index for the Russell 2000, published under the symbol RVX.
2) Price action over the last several sessions has increased the average one month correlation among S&P 500 components. We noted only a week ago that stocks were moving at very low levels of realized correlation, so maybe we were due for a reversion to the mean there.
3) Finally, it's interesting to note what didn't happen skew-wise. As I'll explain at tonight's event, the most meaningful way to measure implied volatility skew is by normalizing the levels of out of the money option IV against at the money IV levels, so that your estimate tracks the actual steepness or flatness of the curve instead of just overall IV changes.