Event Vol Isolation · Foundations
Free to readDiffusive vs Event Volatility
Two kinds of volatility hide in one implied number. One drifts and reverts; the other waits for a date and then vanishes. Telling them apart is the whole game.
Implied volatility is a forecast of total movement. But that movement comes from two sources with opposite personalities — and the option market prices both into the same reading.
Diffusive volatility — the background
Diffusive volatility is the steady, continuous noise of normal trading: the day-to-day drift and chop that happens with no headline attached. It mean-reverts, it trends with the regime, and it's what most people mean when they say "vol." It's the durable part of the reading — the event-stripped baseline.
Event volatility — the scheduled jump
Event volatility is the expected one-day jump around a known catalyst — an FOMC decision, a CPI print, an earnings report. The option market prices in extra premium ahead of the date to cover the gap risk. Its defining feature: it collapses the instant the number is out. The uncertainty resolves, the premium that was insuring it evaporates, and implied vol drops — the classic post-event vol crush.
The baseline (dashed) is steady. Total implied (solid) builds the event premium ahead of the date, then crushes back to baseline the moment the number prints.
Variance additivity — how they combine
Volatilities don't add, but variances do. Over the window, total variance equals diffusive variance plus the sum of each event's variance. That's the math that lets the tool subtract the events cleanly and recover the baseline: estimate each event's expected variance contribution, take it out, and the diffusive vol is what's left.
Why the distinction pays
Because the two trade differently. A reading that's rich on event vol is rich for a reason that disappears at the print — the setup for selling the event premium and harvesting the crush. A reading that's rich on the diffusive baseline is a more durable statement about the regime — closer to a real vol signal. Confuse the two and you either sell a crush that isn't there or buy a baseline you thought was an event.
Diffusive = durable, mean-reverting regime vol. Event = a scheduled jump that crushes at the print. The baseline is the number to compare across days; the event chunk is the number to trade around the date.
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