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1. Newedge U.S. Listed Options Sales
Market Commentary June 9, 2009
Ryan Nolan Renicker, CFA
646-557-7999 TLT Volatility Rich
John Martin
646-557-7724 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.