Accuracy of IV for Expected Move (for CALLS only)

[MoneyMatthew]

There is a boring ol' Cart&Horse thing of which to remind you: IV cannot be "accurate" -- it is an outcome, not a quote. It is derived from option premiums in the market, not quoted from some source and used to produce option prices. So, "IV" cannot be *accurate* -- it was never meant to be predictive, it is *implied* to be predictive, and stems from prices that the options market sees in active trade, for the buying *and* the selling of risk. If you yourself see a dollar's worth of risk, don't you want at least $1.01 for the exposure?

What is more, is that IV *should*be* greater than actualized vol, if the option market was smart enough to accurately gauge risks/potentials while IV quotes were being drawn. BUT THAT COULD CHANGE IN THE NEXT MINUTE. Does that mean the prior IV quotes were *wrong* or were *inaccurate*?? Hardly.

So, all you're looking for is any sort of assessment on how well ("or not!") IV tracked with the actualized, 'received', *historic* volatility x_many days later. Well, there are issues here, too.
1) The IV sources for the SPX are not the same as those of AAPL or GOOG or DIS or FB or whomever else you might wish to quote.
2) The IV regime extant in any of these big mover/shaker markets WILL ITSELF change, over a matter of hours, days, weeks, months, and as we've seen in calendar 2018, years.

Does this mean that your question searches to nail down a fuzzy irrelevancy? Well, yeah, kinda, but it's still a good thing to have a handle on -- this relationship between current, ephemeral IV, and the to-be-observed historic. Just don't expect this relationship to cover the rest of the financial world, or the corner at which you peak today, too far into the future. This shit will change and slap you in the face, ass, face, ass, .... (you get the idea) faster than you can say, "I has gotz options."

I am not looking for absolute certainty in anything. I just want to see the historical performance of IV from that moment in time forward. Sure anything can change at any moment, that is the market and that is life.

I can't prove that a stock will continue to go up in the future. But when I find a stock that meets my subjective criteria of strength I want to see how well IV corrals those expected moves. Every symbol is different with a different set of market makers, players and participants. It is their collective buying and selling of that helps shape future expectations of IV. Some will do a better job collectively than others.

I just want to know who is doing the worst job of pricing ATM Calls over the last year for certain stocks. Any idea how often the Closing price of the VIX predicts the SPY or S&P 500 Cash 30 days out on the upside? I have provided the data in the above posts. I just need to write the code. If you have the framework already set up to answer that question then please share the results here!!!

 

[MoneyMatthew]

This shit will change and slap you in the face, ass, face, ass, .... (you get the idea) faster than you can say, "I has gotz options."

One other thing for anyone else reading this, I am interested in this study from a Long Call/Long Premium perspective. Selling Premium Naked or even in a spread is a nice way to gather a ton of wins and then the inevitable soul crushing 3 stdev lighting fast move that knocks your head off and takes half a year or more of profits back. I have no interest in personally backtesting the tastytrade method of premium selling but my understanding is you would earn a whopping 3% a year with some insane drawdowns even in the best case scenario.

 

[newwurldmn]

Thanks for the reply. On stocks that have trended up well like IKBR and MA the implied vol on upward moves has always been wrong. I am not good enough to predict OTM moves. I am just saying that 1 Stdev upward expected moves seem to happen more than IV is saying.

How was the implied vol wrong? What did it imply and what did they carry?

 

[MoneyMatthew]

How was the implied vol wrong? What did it imply and what did they carry?

Maybe "wrong" is the wrong word. Let's say that implied volatility shows a 30% chance of a move happening and you later historically find out that the 30% event actually happens 40% historically then that pricing models suggests IV was undervalued by 10%. Now if you reverse that scenario you have volatility that is more expensive than the implied outcome. This is why some brave folks (not me) like to sell premium before earnings. They fell that the implied move is overstated and overvalued and that IV will collapse before price ever reaches the sellers strikes. I simply want to find out the opposite, how undervalued are CALLS in certain stocks that I have subjectively picked. It isn't a news that PUTS are typically more expensive than CALLS, I just want to see how "off" the pricing is on the CALL side.

 

[newwurldmn]

Maybe "wrong" is the wrong word. Let's say that implied volatility shows a 30% chance of a move happening and you later historically find out that the 30% event actually happens 40% historically then that pricing models suggests IV was undervalued by 10%. Now if you reverse that scenario you have volatility that is more expensive than the implied outcome. This is why some brave folks (not me) like to sell premium before earnings. They fell that the implied move is overstated and overvalued. I simply want to find out the opposite, how undervalued are CALLS in certain stocks that I have subjectively picked.

Don’t you need to backrest thatyourself?

 

[MoneyMatthew]

Don’t you need to backrest thatyourself?

That is exactly what I am going to do. It never hurts to check first. For example, if someone said "I am going to spend the next month backtesting tastytrade's strategy" then I or someone else would speak up and say "hold on a second there ; already been done, check this out".

 

[newwurldmn]

That is exactly what I am going to do. It never hurts to check first. For example, if someone said "I am going to spend the next month backtesting tastytrade's strategy" then I or someone else would speak up and say "hold on a second there ; already been done, check this out".

Ah. I get it now. I don’t know of a study that showed if upside calls are statistically cheap. That’s been a typical view that skew is overpriced but I think most are trying to monetize the downside more than the upside.

Certainly you could find a subset of stocks where upside calls are statistically cheap.

 

[stepandfetchit]

This is an interesting thread. I am not totally in-sync but thought I'd throw this out. I wrote a fairly simple TOS Study to create a "RealizedFutureVolatility" -- Which merely cheats, and looks at what actually happened, and line up the time line to the Implied Volatility. The one shown here is the VIX and the equivalent statistical volatility over a rolling 21 Trading days (close approximation to 30 Cal days). Highlights the intervals with IV < RFV (infrequent and apparently very seldom tests the upper move-if ever). Comparing against SPX (instead of SPY to eliminate any glitches with dividends etc) -- See middle study (RealizedFutureVolatility VS Implied)

 

[MoneyMatthew]

This is an interesting thread. I am not totally in-sync but thought I'd throw this out. I wrote a fairly simple TOS Study to create a "RealizedFutureVolatility" -- Which merely cheats, and looks at what actually happened, and line up the time line to the Implied Volatility. The one shown here is the VIX and the equivalent statistical volatility over a rolling 21 Trading days (close approximation to 30 Cal days). Highlights the intervals with IV < RFV (infrequent and apparently very seldom tests the upper move-if ever). Comparing against SPX (instead of SPY to eliminate any glitches with dividends etc) -- See middle study (RealizedFutureVolatility VS Implied)
View attachment 185804

That is interesting and forgive me if I missed this is your study but my goal is not to measure IV vs. Realized Volatility. My goal is the take the POT (probability of touch) which is calculated using IV. I want to see how often PRICE exceeds the upper 1 standard deviation set by the current IV.

Let me give you a real current example using the SPY:
The current ATM IV for June 15th 2018 expiration 13.54%
So what would be the price of the SPY 1 standard deviation upwards based on current implied vol? It would be about 278.18
So using a probability of touch calculator the current implied vol of 13.54% says that there is a 34.44% Chance that the SPY will touch 278.18 on or before expiration. Now there is a 34.44% chance as of today that 278.18 will be touched before expiration, this is not an absolute certainty but it is what Implied Volatility is currently saying. The point of my study is to look back and see how well that 34.44% chance of touching holds up historically. If you find a stock that drifts upwards then the IV will stay cheap due to a lack of volatility and I expect those upper price bounds to be undervalued. Undervalued from an IV perspective.

 

[MoneyMatthew]

https://www.tastytrade.com/tt/shows/market-measures/episodes/testing-probability-of-touch-10-27-2014

It looks like the tastytrade gang did some research on this. But it is slanted to support their bias on selling premium. Again, I have different goal and that is to isolate things on just the CALL side/long premium side.