IBM & Thanksgiving IV Crush

IBM seems to have been really effected by pre holiday weekend IV Crush. The theory is, that as the long four day holiday for Thanksgiving approaches, the Market Makers are pushing down implied volatility quite severely so that they are not giving away free Theta over the long break.

As you can see from this chart of IBM the implied volatility line has dropped by around 6% even though the price has dropped slightly over the same period. Normally, one would expect that if price drops that implied volatility should rise, but not on this occasion it would seem.

Looking at the risk chart of IBM on the left, this represents an IBM Double Calendar as at Wednesday COB 25th November 2009. Notice that the white P&L line is way below the zero line and this trade is making a loss. It was not always like this. Over a week ago the trade was very healthy and making a profit, but as the weekend holiday approached the implied volatility began to drop dramatically.

Now look at the risk chart below - I have rolled the trade date forward to estimate the position as at the Monday after the four day break and also increased the implied volatility up by 5%. This estimate is based on the price chart above which shows a drop of 6%..

Notice that after adjustments the white P&L line is now significantly back above the zero line., Now assuming implied volatility is mean reverting, the volatility should begin an upward journey back to it's mean position over the next week or so. Or maybe not, there are no promises.

However, the risk graph does demonstrate how material the implied volatility crush has effected the profitability of IBM over the past week.

Cheers