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If the spread is still Theta positive it's worth hanging in there 9 times out of 10. But if you're Theta neutral or negative then leg down (and / or out) as you're not getting paid for the short Gamma risk.

LM3886 HV is backward looking and serves no purpose. IV is the markets expectation of VOL going forward. So I personally use the IV for the options month that I am trading. I use strike IV to the downside (Puts) which takes into account the Skew and the ATM IV for the upside (Calls) which...

Worth every penny mate, should have done it years ago ! Speak soon.

LOL. Been really busy with the day job, oh....and a divorce ! Hope to get on these boards more often, I miss the pearls of wisdom :)

Have to disagree. Nothing wrong with adjusting (though I wouldn't call it a "repair") if a position goes against you. Sell naked Puts and the stock tanks then close them off and open lower, sell a few calls to the upside too. Works for me, not that I haven't taken some big losses, I have...

Volatility Skew. Do a google.

Fascinating ! So if (and I repeat IF) the future volatility of the underlying could be known in advance you still couldn't determine the "fair value" of an option on the underlying ? If your answer is Yes, then that contradicts your assertion that IV is a flawed measure. If your answer is...

Yes. Took a severe battering Sep/Oct, but I survived.

The concept of VaR is a probability of an occurence, which in turn is a function of the volatility of the underlying stock, or if you prefer (I use) the implied volatility of the underlying stock's options. Also you need to determine what time frame you're going to use and with what confidence...

MTE is correct. The basic idea is to exploit a discrepancy between the implied volatility of an index option and the implied volatility of that index's constituent stock options. For any given stock option IV and it's weighting within the index you can derive an implied correlation of the...

Some useful discussion here; http://www.elitetrader.com/vb/showthread.php?s=&threadid=34499&highlight=egar

The further you go OTM the greater the leverage. A ball-park formula is Leverage= Option Delta x (Spot / Option Price). That gives you the change in option value (%) for any given 1% change in the Spot.

Appreciate your advice.

I disagree. There are different ways, but not better ways.

Not always !

M@W and DMO - Interesting comments , thanks. But I'll stick with the market's estimate of future vol, which has served me well, so far.....

Neither does the guy that is selling them to you. Either I'm not making myself clear, or you've missed my point. Out of interest, what do you and DMO use as a future volatility forecast ?

DMO I don't see what else you could possibly use as a volatility forecast (?). The best estimate (IMHO) is the marlet's estimate.

DMO Regarding expected future volatility I was actually refering to ATM options. But the principle of market concensus equally applies to any skew - namely that the concensus is that markets crash down much more often and severely than they crash up. From the IV's that you quote you could...

MasterAtWork He's right. If the market thought the volatility implied in the option was too low (too cheap an option) the option would be bid up until that was no longer the case. Vice versa for what the market thought was too high implied Vol. The volatility implied in any option is the market...