Strategies · Library · Stocks
§3.5Volatility
Implied volatility
Stocks whose call implied volatility rose over the past month have tended to do better, and those whose put implied volatility rose have tended to do worse. Go long the first group and short the second.
- Asset class
- Stocks
- Held for
- Weeks
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- One-month change in call implied volatility and in put implied volatility for each stock.
- Entry and exit
- Rank monthly; long top decile by call-volatility rise, short top decile by put-volatility rise; hold a month.
- Sizing
- Equal weights per side.
How it fails
- Needs clean option data for many names
- Illiquid options distort readings
- Short leg needed
Data it needs
- option implied volatilities by stock
- daily prices
ARCANE has no options chains or implied volatilities.
How ARCANE uses it
Not usable; a Call on a stock's direction cannot cite this signal.
Needs option implied volatilities and shorting.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §3.5, p. 44 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.