Seasonal volatility
Generalizing lessons from natural gas options
Friends,
On Jan 28th, one of my favorite topics came up in the Moontower Discord: natural gas options!
I was asked why the VRP was so low.
Recall VRP is the comparison of implied vol (forward looking) to realized vol (backwards) looking. In this datapoint,
One month IV = 49%
One month RV = 86%
The strange datapoint is a perfect icebreaker for discussing:
seasonality (which happens to be most strongly expressed in natural gas)
a common pitfall (and potential correction) for VRPs
Background
Before discussing options, we need to understand the shape of seasonality and the fundamentals that drive it. I’ve said many times that I’m not a fundamental trader. That means I don’t position based on any views about fundamentals. But a basic understanding of fundamentals is necessary to make sense of why an asset’s vol surface looks the way it does.
Let’s begin…
