Dori Levanoni
April 29, 2021

The options market can shed light on how some market participants are viewing future market risks. At the start of 2021, the options data suggested a “steady as she goes” outlook for Q1. Options traders were mostly right -- there were a few brief episodes of volatility, but markets settled pretty quickly each time.

Let’s see what markets are saying now that we’re a quarter into the year. We re-ran the analysis using data from April 9th to see what the S&P500 index options market might be telling us now.

The short answer is “really Normal.” We can look at each of the upcoming options expirations (from April 19th, 2021 all the way out to June 17th, 2022) and calculate a composite implied volatility (similar to, but not quite the same as, the VIX). Figure 01 below shows this estimate, compared to the long-term VIX median.

(April 2021 - June 2022)

S&P 500 Option Implied Volatility

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

Two things are apparent in the plot. First, very near-term volatility expectations are relatively low, but they rise over the next couple of months until they are close to the median VIX. Second, once they rise to that level, they’re quite stable for the at least the next year or so.

Volatility is a summary measure of a distribution. We can also look at the individual distributions of risk-neutral probabilities, which give a deeper sense of market participants’ outlook. Figure 02 plots these distributions, correcting for expiration dates to make them directly comparable.


Risk Neutral Distributions

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

They all line up quite well, with a typical bell curve shape. In other words, not only are the standard deviations that we looked at above all in agreement (once we go beyond a few weeks), but the overall distributions are all in agreement as well!

In other words, things are starting to look pretty normal around here!

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Past results are not indicative of future investment results. Commodities trading involves substantial risk of loss.
© First Quadrant, L.P. 2021. Intended for Institutional and Qualified Eligible Persons Use Only. The views expressed are the views of First Quadrant, L.P. only as of the date shown and are subject to change without notice based on market and other conditions. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice, recommendation, or solicitation of any particular security, strategy or investment product. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of domicile. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

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