The market is rising, and so is volatility. Since September 18 the Nasdaq-100 has gained about 4%, while the VXN volatility index rose from 19.3 to 22.5 points (October 1) and stood at 21.2 on October 2. Options usually cheapen in a calm advance. This time the opposite is happening.
The market itself is moving quietly: realized volatility on the Nasdaq-100 over the last nine sessions is around 10–11% annualized, half the level of VXN. Options are pricing a move that has not yet materialized.
It is the wings, not the center, that are getting more expensive. On Monday, at-the-money implied volatility on January QQQ options was little changed, while implied volatility on Calls 5–6% above the market rose by about 0.2 points. Buyers are paying for the fear of missing the rally: SpotGamma estimates that Call-wing skew on the Nasdaq-100 is elevated, though still short of its May extremes.
This is an unfavorable regime for volatility sellers: losses come not from market moves but from the repricing of options. What we are watching next: if realized volatility stays low, the premium should deflate. The risk is an accelerating rally in which Calls continue to get more expensive.
Editor’s Note reflects the author’s market perspective at the time of publication and should be read as commentary, not investment advice.
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