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Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here. |
- We have been including fixed strike volatility in the Tier1 note; let’s talk about the basics of what it is. Fixed strike volatility is the volatility of an option's price when the strike price is held constant. It represents the market's expectations of future volatility for options with a specified strike price, regardless of changes in the underlying asset's price.
- Calculating fixed strike vol historically involves calculating the standard deviation of returns for the underlying asset over a specified period, but focusing on a particular strike price.
- The implied method derives fixed strike volatility from the market prices of options with the same strike price but different maturities, using models like Black-Scholes.
- Traders use fixed strike volatility to assess and hedge the risk of options portfolios. This helps them understand how volatility affects options with a specific strike price.
- Volatility Skew Analysis aids in examining the volatility skew, which is the pattern of implied volatilities for options at different strike prices. This is useful in identifying market sentiment and potential mispricing.
- Investors may use options with known fixed strike volatilities to hedge specific risks in their portfolios.
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Learn more about the Market Situation Report written by Tier 1 Alpha. |
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