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Why Implied Volatility May Stay High After a Binary Event

Article Quant Q&A · Author: Winston Du
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Summary

The document examines why implied volatility in election-related stocks did not uniformly fall after the Georgia Senate runoff was called. The question expected an event-driven volatility crush, yet one renewable-energy stock rose while its volatility stayed elevated and a technology stock’s volatility increased.

The answer frames implied volatility as a measure of uncertainty about future outcomes, not merely uncertainty about the event that has just concluded. An election result can change expectations, but future laws and their company-specific effects remain uncertain. Other sources of uncertainty, such as competition, pricing decisions, and reopening of theaters, can also influence a stock’s implied volatility. The examples illustrate why event resolution does not guarantee lower volatility or a uniform response across securities. The discussion is qualitative and offers no model, options data, or way to isolate the event’s contribution from other factors.

Key ideas

  • Implied volatility reflects uncertainty about future outcomes beyond a single binary event.
  • Resolving an event does not guarantee that a stock’s implied volatility will fall.
  • The same event can affect companies differently as expectations about future policy change.
  • Competition, pricing decisions, and reopening prospects can contribute to company-specific uncertainty.

Tags

OptionsVolatilityEvent-drivenEquities
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# Why might Implied Volatility continue stay elevated even after binary event?


# Why might Implied Volatility continue stay elevated even after binary event?












After the Georgia Senate runoff results were called today (Jan. 6, 2021), I had expected the IV on many election-related tickers to fall. In other words, I thought a major IV crush was in the cards.

For example, SolarEdge Technologies (SEDG), which benefits from a Democratic Senate, should have seen its implied volatility fall drastically over the day while the stock went up.

Conversely, tech stocks like NFLX, which are harmed by a Democratic Senate, saw their volatility go UP.

I don't understand. Isn't Implied Volatility supposed to fall after the related binary event?

## Answer by D Stanley (score 1)

https://quant.stackexchange.com/a/60380

Implied Volatility represents uncertainty. While the election is over, there is no certainly in future laws that will help or hurt any company. There are certainly other factors other then the election which can increase uncertainty for the company.

Same for NetFlix. The election is one of only many factors which contribute to uncertainty. Again, no future laws are guaranteed, which adds uncertainty (perhaps it was more certain that no new regulations would come with a GOP senate, but the opposite is not necessarily true). There are many other factors as well: Competition in the market? The effect of its price hike? Reopening of movie theaters? All of these contribute to uncertainty.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.