Michael Saba, Head of Income Products at Evans and Partners, made an interesting observation recently. He and his team looked at the relationship between hybrid margins and implied volatility and they found a rather good explanation for changes in trading margins since mid-2013.
Without going into the finer details of options pricing, implied volatility can be thought of as an indicator of the expensiveness of an options contract, all other things being equal. If participants in an options market think future prices of the underlying asset are likely to be more volatile for a future period (than average), then prices of options on that underlying asset tend to rise, whether they are “call” options or “put” options. In the absence of mispricing, higher option prices can be said to imply expectations of higher price volatility.
