Forum » General » HUGE Divergence in Put and Call Implied Volatility For Government Bonds. Has Anyone Seen This Before?

HUGE Divergence in Put and Call Implied Volatility For Government Bonds. Has Anyone Seen This Before?

Vulturepic_thumb Brokerage Account

Posted by sublimevotum on April 12, 2012 (11:04PM)

Check out the following chart that shows the implied volatility for IEF (an ETF that holds 7-10 year US Government bonds) as implied by both put options (the blue line) and call options (the yellow line).  This chart is from the "Volatility Charts" section here at TradeKing.  

I've personally never seen such a large divergence in the implied volatility of call and put options with anything other than US Gov. bonds.  

I'm very interested in knowing whether anyone out there knows if this has been the case historically for US Government Bonds or for any other financial instruments.



Monkey_thumb Brokerage Account

Posted by OldFart on April 13, 2012 (10:47AM)


I do not trade this product but the first thing to check is if there is a dividend coming. Dividends push puts up/calls down
Vulturepic_thumb Brokerage Account

Posted by sublimevotum on April 13, 2012 (05:14PM)

Thanks OF.  I'm not sure off hand, but I'm pretty sure that most (if not all) bond etfs pay out dividends (from the bond coupons).  I don't think this would explain all of the divergence we see, because I checked out other bond etfs (non-US Gov. bonds) that don't have such a huge divergence, but this may explain part of it.
Monkey_thumb Brokerage Account

Posted by OldFart on April 15, 2012 (12:46PM)


sub, as you are aware puts and calls must trade with the same IV or free arbitrage exists. In the market though this rule breaks sometimes, these two cases account for 99.99% of the difference

1) Imaginery - when dividends are coming, dividends are part of the put/call parity but the IV software does not known about the
2) Hard-to-short shares - MM push up the price of the puts, bcz they can not find shares to short when selling puts

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