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Sunday, March 10th 2019

Options Secrets: The Important Signals from Forward Implied Volatilities

Forward implied volatilities are important indicators of market sentiment and future performance of the stock and historical volatility.

Summary

The ratio of flat forwards to regular forwards is an important indicator of future stock movement. Extremes in this ratio have led to extremes in underlying stock movement. The signal currently suggests a potential downturn in the market. Access to the ORATS forward ratio is available through their Data API free trial.

We discussed the calculations of forward volatilities and flat forward volatilities in this prior post.

Today we will talk about a little know secret derived from the relationships of flat forward and forward volatilities calculations. And the bulls may not like what the signal is saying now.

Flat forwards are much less used than the normal forward volatility computation. Expert calendar spread traders use this calculation to exploit anomalies in the term structure. Flat forwards are more important to these traders because the calculation shows the IV level where both the front month and the back month match.

The ratio of flat forwards to regular forwards are important indicators in future stock movement. In our studies, extremes in the ratio of the flat forward and regular forward led to extremes in the underlying stock movement.

Let's look at two very different scenarios, the quiet 2017 and the volatile February 2018.

The quietest month of 2017 was October (ironically) with a historical volatility of 5.4%. Oct 2017 was also the high of the forward ratio.

 

 The volatile February 2018 was preceded by a drop in the forward ratio. And so was the volatile October 2018 and December 2018.

What the signal now? Not good. And this may not bode well for the market.

Get access to the ORATS forward ratio today and get in on this options secret!

Sign up for the Data API free trial and request forward volatilities. We discussed the calculations of forward volatilities and flat forward volatilities in this prior post and signals from contango here.

Disclaimer:

The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.

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The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors. For more information please see our disclaimer.
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