directional implied volatility

[Jones75]

Hi,

I’m in my 3rd year of trading options, and have had reasonable success, however I keep coming back to this thing about options being non-directional. My experience is telling me that in fact they are. Let me give an example.

Suppose it’s ER day and your stock is at $30, and you have an OTM $29 put with a 30% iv, and the underlyer moves 5% lower. Your put’s iv does not collapse, if anything it will ascend and vega becomes a friend.
Yet if you reverse that, and have an OTM $31 call with 30% iv, and the underlyer moves up 5%, the iv collapses and the vega crushes.

This is why I find it is very difficult to find stock thats had a major pullback with low iv calls or find a 52 wk high with low iv puts.

Would enjoy reading other thoughts on this.

 

[xandman]

You are probably confusing the term non-directional with being delta neutral. Your delta (directional) exposure changes fast(er) depending if your are long or short vol. Long vol positions also have a long gamma exposure. So, you pick up deltas faster when it moves.

You may want to structure and model the PnL of ratio spreads which accentuate convexity to underlying price changes. After digesting that, apply volatility shocks to your visualization to see changes in convexity and the more palpable changes in PnL levels. Then, compare that to naked positions.

I think your other statement meant you wanted a find stocks at their relative (52 weeks) high and have HIGH IV puts. I would give up the ghost on those scenarios. It's just un-American.

Check out EFA and FXI, though.