Portfolio Design with TheTape

Portfolio Design with TheTape

Share this post

Portfolio Design with TheTape
Portfolio Design with TheTape
Building Blocks of Volatility

Building Blocks of Volatility

Parsing a "qualt" framework for the components of variance

Mark Phillips's avatar
Mark Phillips
Feb 23, 2024
∙ Paid
1

Share this post

Portfolio Design with TheTape
Portfolio Design with TheTape
Building Blocks of Volatility
Share
An enhanced educational image depicting the implied volatility pricing model with additional elements. The scene includes colorful blocks or bricks, each labeled with components of the model such as 'Underlying Price', 'Strike Price', 'Time to Expiration', 'Risk-Free Rate', 'Dividend Yield', 'Baseline', 'Event Vol', and 'Skew'. These blocks are stacked in a visually appealing way, symbolizing the intricate composition of the model. The background features a financial office setting with subtle elements like graphs and financial charts. The image is designed to be both professional and captivating, ideal for a blog on options volatility and pricing.
Created with DALL-E

Setting the Table:

  • In case you’ve been hiding under a market rock, NVDA carried the entire stock universe on its back to bring indices to all time highs. 

  • Liquidity dipped a bit yesterday as markets widened into the close. We often associate bull markets with drops in volatility and tightening of spreads, but that’s more of a medium term phenomenon. A sharp repricing up or down of spot puts markets temporarily wide.

  • We’ve been seeing the 30 day implied tango with 30 day realized, and the backward looking 30 day VRP has ticked negative. Intraday realized continues to peg much lower than either figures, so these are after hours moves.

  • SPY curves continue to flatten, with the 10 day IV dropping puts and bidding calls relative to its recent past. Fear of missing out is the risk here, downside feels impossible. Further out of the money collars start to look cheaper because of this.

Learn More About TheTape

Identify:

  • We spend a lot of time talking about different measures of volatility. Implied, historical, GARCH, Parkinsons, etc.  If you really want to go down a rabbit hole, NYU Stern has a “V-Lab” to play with many different models and their variants. These are all quantitative models for describing what is going on in the volatility space. 

  • Today, I want to propose a “qualt” framework for thinking about volatility, and breaking down what’s happening under the hood. We’ll talk a bit about the VIX, how it’s different than ATM volatility, components of event vol, and other frameworks to break down what the figure is saying. 

  • When seeking trading opportunities on the buy side, it’s critical to have an opinion about what might be mispriced relative to your risk tolerance. The fact that markets are generally efficient does not obviate the existence of positive expected value trades, particularly within a disciplined framework. Parsing what makes up volatility helps us do that. 

Keep reading with a 7-day free trial

Subscribe to Portfolio Design with TheTape to keep reading this post and get 7 days of free access to the full post archives.

Already a paid subscriber? Sign in
© 2025 Mark Phillips
Privacy ∙ Terms ∙ Collection notice
Start writingGet the app
Substack is the home for great culture

Share