How do you value vol?

Nice Info; curious... how would one incorporate IV strategies in an trading system:

1. Get OPRA data feed from NxCore (Nanex) or the exchange
2. Compute ivol ATM and other variables realtime
3. Design trading strategies around ivol depending on the timeframe

Curious about the tools/data feed that retail investors and institutional investors use... any pointers can help

thanks,
 
TheBigShort said:
Solely looking at ATM IVOL you can view it in a few ways. I usually look at vol in either absolute terms or relative terms.

Relative:
For example you might use SPY IVOL to help you price an illiquid security. You can also compare SPY IVOL with XYZ IVOL to find rich/cheap trades. Thirdly, you can compare SPY IVOL to a basket of its constituents (dispersion trading). These methods are looking at the world in relative terms. Partial pooling/multilevel models can be of great help here.

Absolute:
When we look at the world in absolute terms, we might try to find a fundamental/news driven trade. For example, you know that company XYZ has a court case coming up in 3 months and the market is not pricing in elevated vol. You might be able to construct a calendar spread to isolate that event.

You can also use things like the GARCH family to help you out. I like the TGARCH for one day look ahead periods. I have not found much use of the standard GARCH (1,1) for a 1 month look ahead period. Margrabe's formula has been of high value for my current strategy (relative value stuff). https://en.wikipedia.org/wiki/Margrabe's_formula

Moving outside of the ATM realm it gets quite furry. @PoopyDeek is a good reference to learn from if you want to go that route.

P.s. programming is really helpful. It's tough to get clients if you are using a screw driver and all your competition are using drills.

p.p.s. I might not have fully answered your question. You can not calculate volatility you can only estimate it. There are many models for estimating vol, Yang.zhang is my favourite on the daily time frame. Of course, the more data the better so looking at intraday tick data would be an even better estimate of stat vol. You can construct a trade by looking at it through a risk reward lens. "If I am right how much will I make and if I am wrong how much will I lose". If stat vol (historical vol) has a range of 20%-50% and current IVOL is 25% than you might have a great risk reward trade on your hands - If you are wrong, you will most likely not lose more than 5 points but if you are right....
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Hi,

I am hopping to compare the SPY IVOL to vix and wonder id you can prpvide more info on the ivol?
Thanks
 
rohan2008 said:
Nice Info; curious... how would one incorporate IV strategies in an trading system:

1. Get OPRA data feed from NxCore (Nanex) or the exchange
2. Compute ivol ATM and other variables realtime
3. Design trading strategies around ivol depending on the timeframe

Curious about the tools/data feed that retail investors and institutional investors use... any pointers can help

thanks,
More...
We have a live data feed through a partnership with Tradier Brokerage and calculate IVs for all stocks, ETFs and indexes, and provide summary calculations. We also have ways to trade fast with opportunities present.
Here a few 'other variables' we calculate in real-time.
"annIdiv": 1.4663663960026643, annualized implied dividend
"borrow30": -0.0014834512140101226, solved borrow rate
"exErnIv10d": 0.3287171290664954, IV 10 days with earnings effect removed
"iv1y": 0.3665318617046922, IV one year 50 delta
"mwAdj30": 0.003998105296688083, market width 30 days in vol points
"rSlp2y": 1.2032656305570337, put/call slope of the tangent line 2 years out
"contango": 0.0029645822666862737, slope of the term structure
"exErnDlt5Iv90d": 0.41647360539787476, IV at 5 delta 90 days out ex-earnings
"dlt95Iv10d": 0.5013781848572263, IV at 95 delta 10 days out
"fwd30_20": 0.34903851882165243, forward volatility 30 days vs 20 days
"fwd60_30": 0.36480133571929396,
"fwd90_30": 0.3999405785964037,
"fwd90_60": 0.43223248174272055,
"ffexErn60_30": 0.3741581944519302, flat forward volatility 90 v 60 day ex earn
"ffexErn90_30": 0.3537940444917674,
"impliedEarningsMove": 0.06817382473105867, implied percent move at earnings
more here https://docs.orats.io/datav2-live-api-guide/data.html#smv-summaries
 
TheBigShort said:
Since SO and yourself buy options leading up into the event. Would you mind posting a current stock's event vol you have a view on? And your reasoning. That way I can do my analysis on it and we can compare what eventually ends up happening. It will make things more exciting. Also, it will be a good indication that I should probably stop trading if Kim Klaiman can predict vol better than I can.
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You guys ever made this happen?
 
.sigma said:
What do you mean by using SPY IV to price an illiquid security? I have no idea what this means but very interested.
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You can adjust it by the stock's beta coefficient. Though, I see it more valuable for risk than pricing.
 
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