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US ETFs offering interesting volatility pairs trade opportunities going into 3Q earnings season

Sep 18, 2018

  • In spite of the recent volatility in US markets, implied volatility is relatively muted
  • The absolute levels of implied volatility suggest that implied risk premiums are not rich in comparison to their 1-year historical averages
  • Wide Implied-Realized volatility suggests there is demand for Puts though Skew remains at average levels -- demand isn't THAT high yet
  • We would highlight Invesco QQQs, tracking the Nasdaq 100, as an opportunity for investors to SELL volatility if they are bullish on tech stocks going forward
  • The iShares Russell 2000, IWM, offers an interesting opportunity for investors to potentially initiate hedge strategies given the relative cheapness of overall implied volatility
  • The wide spread between implied volatility and realized volatility points to a mean reversion in volatility for small-caps stocks -- a long volatility trade would benefit from this bounce back in overall REALIZED volatility
  • This rationale can also be applied to the SPDR S&P MidCap 400 ETF, MDY, where implied volatility remains very cheap and implied-realized spreads are wide



ETF Names Ticker Implied Volatility 1-Year Percentile Implied-Realized Volatility Spread 1-Year Percentile Skew 1-Year Percentile
SPDR Dow Jones Industrial Average  DIA 38.14 91.90 49.60
SPDR S&P 500 Trust SPY 40.12 82.81 25.10
SPDR S&P Midcap 400  MDY 27.08 89.92 92.29
Invesco QQQ Trust Series 1 QQQ 59.09 60.28 61.46
iShares Russell 2000 IWM 29.84 95.45 68.58
Source: Bloomberg