If you trade volatility across the time horizon (short-term, medium-term, and long-term) you may have wondered at some point which type of volatility in your portfolio was the most sensitive.

Meaning if volatility picked up substantially, where would your book be the most impacted, and to what degree?

A recent episode of Options Jive took a closer look at this precise question, and we think the findings are worth a few moments of your time.

In order to provide proper perspective on the sensitivity of volatility across the time horizon, the Options Jive team first examined data relating to the intraday trading ranges of 2-week, 1-month, 3-month, 6-month volatility.

This data, depicted below, illustrates clearly that short-term volatility has the highest average intraday range, as well as the highest maximum range:

sensitivity of volatility

The data above provides valuable insight on the sensitivity of volatility over the time horizon.

However, to add further context, the Options Jive team next reviewed instances in recent history when volatility spiked. The goal was to ensure that additional data backed up the findings in the chart above.

While volatility has been depressed for an extended period, the 2016 Presidential election in the US coincided with a dramatic spike in volatility.

Looking at implied volatility during the Presidential election, tastytrade research once again confirms that short-term volatility spiked to a much greater degree than long-term volatility, as shown below:

presidential election volatility index

Based on the two charts included in this post, we can see quite clearly that short-term volatility exhibits the most sensitivity to change - particularly when the volatility is increasing.

The last remaining question is whether this tendency holds when volatility is dropping. Is short-term volatility still the most sensitive under these conditions?

In order to answer this question, the Options Jive team ran another backtest which looked back at instances when the SPY increased by 1% - conditions which usually catalyze a reduction in implied volatility.  

This examination showed that 2-week volatility decreased by the highest amount (on average) when the broader market was rallying.

We hope you’ll take the time to review the complete episode of Options Jive focusing on the sensitivity of volatility when your schedule allows. The information included in this approach may help you tailor your approach to better match your outlook and expectations.

If you have any questions or comments, please don’t hesitate to leave a message in the space below, or reach out directly at support@tastytrade.com.

Thanks for reading!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.