Implied Volatility vs. Real Volatility

Brighton · Jan 22, 2013

Quote from cdcaveman:

The long vol trader sees large returns only only seldom and in those years gets wacked hard in a higher tax bracket more then even losses from previous years can make up for..

That's one hypothetical. Throw Section 1256 contracts and their special loss carry-back provisions into the mix (and assume the trader's strategy goes cold again) and he might get a tax refund from his year with the big wins. And he will keep guys like your father very busy.

cdcaveman · Jan 22, 2013

Quote from Brighton:

That's one hypothetical. Throw Section 1256 contracts and their special loss carry-back provisions into the mix (and assume the trader's strategy goes cold again) and he might get a tax refund from his year with the big wins. And he will keep guys like your father very busy.

We live in florida. No big accounts here trading derivatives really... mostly retirees looking at under performing structured products.... because losing your money to inflation isn't as risky as equity to them.... maybe they are right... but those high paying prudential products are the talk.....

I wish the long vol set up was discussed more... it interests me... be nice to get long in wings in some efficient way... its the bleeding to death people can't handle ... not the sudden quick death by blow up.... its like.. idk weird...

newwurldmn · Jan 22, 2013

Quote from sle:

Think of another interesting factor while being long volatility - you are short convexity on your income, unless you are all in the upper bracket. For example, imagine that you are long gamma and lose money 3 years out of 4, but in the 4th year your end up making 100% on your capital. For simplicity sake let's say that your average return is about 20%, but you will end up paying top rate on your one good year and get very little relief in the 3 losing years. If, however, you are making 33% per year being long carry and end up flat in the 4th year - you will be paying lower absolute amount of taxes in your 4 years of trading.

You get carry forward on your losses. So if you lost 100k a year for three years and made 400k the fourth year you pay taxes on just 100k on the fourth year.

Each state is different though.

optionbull · Jan 22, 2013

Quote from sle:

Think of another interesting factor while being long volatility - you are short convexity on your income, unless you are all in the upper bracket. For example, imagine that you are long gamma and lose money 3 years out of 4, but in the 4th year your end up making 100% on your capital. For simplicity sake let's say that your average return is about 20%, but you will end up paying top rate on your one good year and get very little relief in the 3 losing years. If, however, you are making 33% per year being long carry and end up flat in the 4th year - you will be paying lower absolute amount of taxes in your 4 years of trading.

but the second year you will be shown the door if you are a pro and if you are a home gamer you will prob back off size or just give up ? Plus the tax laws can change overnight?

sle- do you trade teenies or more about option "structure" ? Your not a underlying directional trader in other words ?

thnx

sle · Jan 22, 2013

Quote from optionbull:
sle- do you trade teenies or more about option "structure" ? Your not a underlying directional trader in other words ?

Does trading VIX options count as being "underlying directional trader"?

optionbull · Jan 22, 2013

Quote from sle:

Does trading VIX options count as being "underlying directional trader"?

I would not know ?? Direction of the vix isnt correlated with market direction but it is a guess on "something " ?

EliteTraderNYC · Jan 22, 2013

Quote from optionbull:

I would not know ?? Direction of the vix isnt correlated with market direction but it is a guess on "something " ?

Not true not true, VIX going up means market going down, strong inverse correlation.

sle · Jan 22, 2013

Quote from optionbull:

I would not know ?? Direction of the vix isnt correlated with market direction but it is a guess on "something " ?

Truth is, I do trade every style (have some delta strategies too), but don't really do proper "AAPL will go up tomorrow" kind of trading. However, in most cases I like being balanced risk premium - if I am collecting theta some place, I want to buy some protection elsewhere.

justrading · Jan 23, 2013

Questions for everyone.

I'm reading a couple of books now which advise basing entries on current IV in relation to historical IV. For example with strategies that benefit from low volatility, they are looking at IV and not the current volatility of the underlying vs historical volatility.

Does anyone do this and if so do you subscribe to any data source that gives historical IV data? Which source?

cdcaveman · Jan 23, 2013

Quote from justrading:

Questions for everyone.

I'm reading a couple of books now which advise basing entries on current IV in relation to historical IV. For example with strategies that benefit from low volatility, they are looking at IV and not the current volatility of the underlying vs historical volatility.

Does anyone do this and if so do you subscribe to any data source that gives historical IV data? Which source?

historical IV can very easily be calculated... thats just the realized vol of the underlying.. if you can get histrical data on the underlying its very simple to come up with a HV number.. theres much more to getting a good representation of what the underlying is experiencing... Garch is one of them... another thread we were talking about scaling HV numbers by the square root of time.. and how information is lost when volatility is aggregated.. meaning larger moves get smoothed out.. and when you take those aggregated numbers and scale by the square root of time your getting an actual larger number representing the daily or weekly vol then it should be.. hope i explained that right...