A review of IV (Implied Volatility) and its usefulness

[Martinghoul]

Quote from OddTrader:


However, I still don't follow the point how supply and demand of volatility exists, as volatility (of prices) itself is either a statistical calculation or an expectation of future value which is derived/implied by a caluculation based on any chosen model you prefer . Who would demand a stistical calculation?

imo, IV is about projected Expetations of volatility of the underlying during a future period of time. There are several major sources for volatility (implied or else), and both price and demand of an option are included.

You're thinking of it wrong. Let's imagine that there's a tradeable commodity out there and let's call it "optionality". Then think of IV, whichever way it's calculated, as a simple measure of the value mkt assigns to optionality, much like yield is a measure of value the mkt assigns to bonds. Now just like with the other financial products (e.g. futures), optionality is something you buy today but for settlement some time from today. If, when time comes, the actual value of optionality turns out lower than what you paid for it (delivered vol < implied vol), you lose money. If it's higher, you make money.

Options prices signify Supply of options, whether there is any demand of them or not. Therefore IVs are always available individually and accordingly for each price (based on projection of future volatility of the underlying), disregarding whether any demand of an option or not.

I am not sure what you're trying to say here. Of course, IV can be computed for any option price, but it's NOT directly based on expectation of volatility. IV is based on the price of the option; price of the option is based on supply/demand for optionality; supply/demand for optionality MAY be based on the expectation of how volatile the asset is going to be in the future, but that doesn't have to be the only input. Again, this is just like any other asset, where supply/demand for it may be based on its expected value.

All your other quotes, OT, just don't do it for me, I'm afraid. They all talk about special cases, without addressing the fundamentals.

 

[OddTrader]

I would agree with you that we still have some disagreements, even you have now changed your statement about demand and supply of the underlying, rather than the volatility!

I'm done with this thread! Bye!

 

[Martinghoul]

Quote from OddTrader:

I would agree with you that we still have some disagreements, even you have now changed your statement about demand and supply of the underlying, rather than the volatility!

I'm done with this thread! Bye!

I have never changed my statements. I have always been saying the same things, but was just trying to approach it from different angles to make my point as clear as can be.

At any rate, good luck with your optional endeavors!

 

[OddTrader]

Quote from OddTrader:

about demand and supply of the underlying, rather than the volatility!

This is wrong on many levels (ref atticus).

http://www.elitetrader.com/vb/showthread.php?s=&postid=2532911#post2532911

Quote from JJacksET4:

dmo,

First you said that IV was only demand. You said "IV is demand. It is nothing else."

Now, you say it is supply and demand.

...

IV is a simple calculation that shows the volatility implied based on what the stock price was, the strike price, the days remaining in the option, and a few other minor things.

I can easily find an option with a 100 IV that has very few trades and I can easily find an option with a 30 IV that has many, many trades and thousands of contracts traded.

Would you say the first option is in high demand? I wouldn't - I would just say someone is willing to pay a pretty high relative price for it - not that a bunch of people are lined up to buy the option.

I am a bit concerned that we are even having this discussion - IV is a very simple calculation that simply attempts to put a number to a relative price paid.

+1

Below is one of the many underlying aspects:
"If (commodity) stockpiles are large, demand can increase and drive uo prices with no visible volatility change. ...

When supplies are considered adequate, volatility tends to subside, even when demand increase. ...

This phenomenon is a good reminder that it is uncertainty about supply more than supply itself that boosts volatility", per Schap.

 

[OddTrader]

Quote from Martinghoul:
Well, I don't know what to say to that. I am hurt.

Do you think this kind of statements would provide/ enhance any rational/ logical way for better analyses/ arguments? I am jusy wondering!

Talk again later with another thread, Ciao!