TLT Volatility Rich - A Sign of Complacency?
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TLT Volatility Rich - A Sign of Complacency?

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Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund ...

Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

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TLT Volatility Rich - A Sign of Complacency? TLT Volatility Rich - A Sign of Complacency? Document Transcript

  • Newedge U.S. Listed Options Sales Market Commentary June 9, 2009Ryan Nolan Renicker, CFA646-557-7999 TLT Volatility RichJohn Martin646-557-7724 A Sign of Complacency? Short-dated iShares Barclays 20+ Year Treasury Bond Fund (TLT) at-the-money implied volatility is currently trading rich relative to that of the S&P 500 Index Depositary Receipts (SPY). Specifically, the ratio of TLT 2 month 50 delta implied volatility : SPY 2 month 50 delta implied volatility is trading more than two standard deviations above the average of where this ratio has traded during the past two years. In fact, this ratio has traded higher only 3 other times during the past 500 trading days (12/21/07, 1/2/09 and 6/1/09). Note that December 2007 and January 2009 represented short-term market “tops” and the stock market subsequently retraced to pre-December 2007 and January 2009 levels, respectively, during the subsequent two months. Today’s high level of TLT implied volatility signals investors’ increasing risk aversion toward fixed income investments and infers a flight from “quality” toward riskier assets such as equities or commodities. This risk-seeking behavior is also reflected in the steepening call skew among other “high risk” securities such as the QQQQ and the IBB (See June 9th Volatility ALERTs for further details). Figure 1: TLT 2-Month 50 Delta IVOL / SPY 2-Month 50 Delta IVOL (6/2007 – present) Source: Bloomberg.