Implied volatility contraction or expansion?

[MrAgi1]

Implied volatility(I.V) is considered by some to be mean reverting and a even more predictable than an underlying’s price.

However between volatility contraction(crush) and volatility expansion(spike); by a significant amount which one is:

1. More predictable?
2. Rarely occurs?
3. Makes bigger/faster/larger moves in shorter time?


Is I.V truly mean reverting and for all asset classes?

 

[stepandfetchit]

my 0.0002 cents

1) contraction
2) spike (more contraction days than spike days)
3) spike (duh)

For all asset classes -- have no clue, as I am unfamiliar with "all asset classes"

 

[ETJ]

Go get a copy of "Master Traders" still available on Amazon. Read the chapter on Volatility - written by my old boss.
A somewhat simple answer rolled into a question. What is implied??

1. The number that fits
2. A discounted forecast
3. Rarely a good forecast of the future.
4. The marketplace pricing the cost of hedging.
5. A snapshot of variation - liquidity, and transparency.
6. Something else.
7. All of the above.
8. Some other combinations of answers/choices.

From the Back Cover
Praise for Master Traders

"Fari Hamzei has assembled an impressive array of trading authors. Fari's own work on sentiment indicators is definitely worth reading, as usual, as is technical 'master' Phil Erlanger's. Furthermore, there is plenty of useful information on derivatives in the chapters by Alex Jacobson and Jon Najarian."
—Lawrence G. McMillan, The Option Strategist and President, McMillan Analysis Corp.

Alex is my old boss. He used to be a member of the forum posting here frequently. Opening a volatility floor operation and shop.

The book is cheap and plentiful. Much of the book is dated - much isn't.

 

[newwurldmn]

Implied volatility(I.V) is considered by some to be mean reverting and a even more predictable than an underlying’s price.

However between volatility contraction(crush) and volatility expansion(spike); by a significant amount which one is:

1. More predictable?
2. Rarely occurs?
3. Makes bigger/faster/larger moves in shorter time?


Is I.V truly mean reverting and for all asset classes?

1. contraction
2. Expansion
3. Expansion, though now contractions can be very violent.

4. Yes. It has to be. Otherwise vol will go to infinity or zero. In reality it mimics fear/greed cycles of human emotions.

 

[MrAgi1]

though now contractions can be very violent.

Wow, that’s a shame. Violent could mean more and more less predictability as time goes on.

 

[BlueWaterSailor]

Wow, that’s a shame. Violent could mean more and more less predictability as time goes on.

Really? Getting more violent - and I certainly agree that it is - sounds to me like more predictability in vol of vol.

 

[newwurldmn]

Wow, that’s a shame. Violent could mean more and more less predictability as time goes on.

I mean that vol can easily spike 20-30 vols in a few minutes. It can easily deflate 15-25 vols in a few minutes now as well. This wasn’t the case 15 years ago. You used to be able to capture 10 of those vols over months.

 

[MrAgi1]

I mean that vol can easily spike 20-30 vols in a few minutes. It can easily deflate 15-25 vols in a few minutes now as well. This wasn’t the case 15 years ago. You used to be able to capture 10 of those vols over months.

I mean the scenario you describe above is not a problem for me. That is A violent vol spike followed by a violent vol crush?

What I am worried about is if for example the VIX have been moving steady for weeks or months around it’s long term average then suddenly it drops 30% to 60% without a previous massive spike?

If the scenario I described above rarely happens(I don’t know if it does), then vol is still a bit predictable IMO.

 

[newwurldmn]

That won’t happen in the vix or other macro products. It can happen in single stocks.

vol is supposed to be more predictable than stocks. That’s why they called it volatility arbitrage because it was easy to make money (if you had the computing power and the market access). It’s harder now because everyone has those things and there’s a lot more money chasing the opportunities and the edge has tightened.

the paradox is that vol clusters, vol mean reverts, and vol spikes. Absent that it’s highly predictable as each of the tenets of the paradox is easy to observe.

I mean the scenario you describe above is not a problem for me. That is A violent vol spike followed by a violent vol crush?

What I am worried about is if for example the VIX have been moving steady for weeks or months around it’s long term average then suddenly it drops 30% to 60% without a previous massive spike?

If the scenario I described above rarely happens(I don’t know if it does), then vol is still a bit predictable IMO.

 

[MrAgi1]

That won’t happen in the vix or other macro products. It can happen in single stocks.

vol is supposed to be more predictable than stocks. That’s why they called it volatility arbitrage because it was easy to make money (if you had the computing power and the market access). It’s harder now because everyone has those things and there’s a lot more money chasing the opportunities and the edge has tightened.

the paradox is that vol clusters, vol mean reverts, and vol spikes. Absent that it’s highly predictable as each of the tenets of the paradox is easy to observe.

Well written. I have a much better understanding now.