Volatility on the brink of rebound

Dispersion analysis and update on the US implied correlation
TAIEX 10-day skewness had touched positive zone for the first time since February 4th and 10-day kurtosis remains negative since last Tuesday as TAIEX jumped 4.74% in 10 trading days and market volatility grounded. In the past 3 days, the US implied correlation index sees 2.15% rebound, which means that more volatile move is expected to happen.



Investor sentiment

Taiwan investor sentiment is quite neutral according to turnover to market cap ratio, which has hovered around 0.50 since February. Although short sell has increased substantially since February 6th, it’s still lower than the 7-month average at 0.80 million shares. Additionally, OI Put/Call ratio has exceeded 1.00 recently but Call/ Put IV ratio still unable to break 0.85 as TAIEX faces strong resistance at 7800 sjnce March.



Volatility analysis and forecast

10D realized volatility and implied volatility had dropped 61% and 34%, respectively, since the breakout of Greek debt event. After these days of quiet market, GARCH forecasting curve has inverted from negative to positive slope. Meanwhile, IV/HV ratio is already on the rise on the 3rd day but still below the 8-month average at 1.49. The US VIX index also rebounded a little in the past 3 days. To conclude, TAIEX OTM put is potentially underpriced and it’s about the time to take profit from vega short and theta long position of March contract.