Volatility has remained elevated in rates markets, while options pricing reveals anomalies across maturities. Implied volatility often exceeds realized, creating opportunities for tactical strategies.
Analysis
In rates markets, realized volatility has fallen modestly, but options pricing remains stubbornly high. This disconnect allows for premium-selling strategies in areas where realized volatility consistently undershoots. Conversely, certain credit options appear underpriced relative to historic spread volatility, signaling opportunities for hedging at lower cost.
Positioning Implications
-
Selling Volatility: In stable segments, investors can sell premium to capture excess implied volatility.
-
Buying Protection Cheap: Where credit volatility is underpriced, cheap hedges can be added.
-
Options Structures: Spreads, collars, and calendars provide tactical ways to benefit from mispricings.
Conclusion
Volatility is both a risk and an opportunity. By identifying pricing mismatches, investors can generate carry or add low-cost hedges, improving portfolio resilience.