INSIGHTS

OPTIONS OUTLOOK Q1: STEADY AS SHE GOES

Dori Levanoni
|
January 13, 2021

The options structure can be a useful tool for identifying market participants’ outlook.

In 2020, global equities followed a sharp V-shaped pattern. Even while the cash market staged a strong recovery, implied volatility in the options market remained well above historical averages. We last checked in on October 30th, 2020 (“Options and the Presidential Election”), using the S&P500 index options to see what the market thought about the November 2020 election. At the time, the options market seemed to be anticipating a spike in volatility right around the election and then a continual decline.

In hindsight, the options market was correct. Volatility started to fall almost immediately after the election, and continued to decline through year-end, even with ongoing litigation surrounding the election and the forthcoming Brexit.

Now, as we start 2021, we see a slightly different story… a much quieter one. Based on data around year-end (December 30, 2020), the options market entered the new year pricing in a continuation of volatility around 20% for most of this year, with a reduction toward the end of 2021, as Figure 01 shows.

FIGURE 01 - IMPLIED VOLATILITIES OF S&P500 INDEX OPTIONS (SAMPLE DATE: DEC 30, 2020)
(January 2021 - June 2021)

Implied Volatilities of S&P500 Index Options (Sample Date: Dec 30, 2020)

Sources: First Quadrant, L.P., CBOE, CRB, and Datastream

Even after the events at the Capitol on Wednesday, January 6, the outlook based on the options market appears pretty similar. Figure 02 more directly compares all three sets of data by indexing implied volatility from the number of days from the sample dates.

FIGURE 02 - IMPLIED VOLATILITIES OF S&P500 INDEX OPTIONS (SAMPLE DATES INDICATED)

Implied Volatilities of S&P500 Index Options (Sample Dates Indicated)

Sources: First Quadrant, L.P., CBOE, CRB, and Datastream

So for now, the best we can say about option traders’ view of the world is “steady as she goes”…

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