Implied Volatility vs. Real Volatility

On second thought I would not suggest anyone buy the Gathereal book unless they are heavily into formal math.

You can read a lot of the same content elsewhere on the web as follows:

At https://aims.ac.za/assets/files/Finance/ you will find lecture notes in the files gathereal.pdf and jim-notes.zip.

Also, in other files with names beginning with "jim", is R code for plotting the volatility surface!

That is the part I was mainly interested in.

Also

http://www.math.ku.dk/~rolf/teaching/ctff03/Gatheral.1.pdf

has other similar material.

I found all these myself by web search. They are not referred to elsewhere that I saw.
 
Quote from comintel:

I have been saving off daily futures options data (all strikes and expirations for futures but not stocks or ETF's) for some time so I will have that data for a couple of years. But the analysis lies ahead of me.

You can parameterize the skews so that you only need to save a limited amount of data. I have not done that yet.
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I have for the time being at least left the futures space. As I am new to options I prefer to make $60 mistakes while I figure out strategies and trade management, so looking at stocks and ETFs.

I think I have a bookmark somewhere for an options EOD data service that seemed reasonably priced. Will try and find it and share here.
 
Quote from sle:

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.
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Ok, how does some where elese become protection if and when any correlation between he two cease to exist ?

Other words protection doent become protection or its not enough OR worse yet it also goes against you >

Thanks
 
Quote from optionbull:

Ok, how does some where elese become protection if and when any correlation between he two cease to exist ?

Other words protection doent become protection or its not enough OR worse yet it also goes against you >

Thanks
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Obviously, it does not work all the time, but I have multiple strategies running at the same time, so I have the benefit of diversification. In anything, in a crisis I usually make money - 2011 was my best year, followed closely by 2008.

I can't get into specifics, but the whole idea is to identify rich risk premia and hedge them with cheaper risk premia. In some cases it is a different type of risk premium on the same product - e.g. I could be short gamma, but hold long-dated skew against it. In some cases it's a correlated product - I might be long variance on Russell and short variance on S&P500. In some cases, it's a farther removed risk factor - e.g. I could be short gap, but long vol-of-vol. And finally, in some cases, I am willing to take idiosyncratic risk in diversified form and hedge away systematic risk.
 
Quote from sle:

Obviously, it does not work all the time, but I have multiple strategies running at the same time, so I have the benefit of diversification. In anything, in a crisis I usually make money - 2011 was my best year, followed closely by 2008.

I can't get into specifics, but the whole idea is to identify rich risk premia and hedge them with cheaper risk premia. In some cases it is a different type of risk premium on the same product - e.g. I could be short gamma, but hold long-dated skew against it. In some cases it's a correlated product - I might be long variance on Russell and short variance on S&P500. In some cases, it's a farther removed risk factor - e.g. I could be short gap, but long vol-of-vol. And finally, in some cases, I am willing to take idiosyncratic risk in diversified form and hedge away systematic risk.
More...

excellent. Sounds interesting. I dont understand it all, but some I do. This is a strategy for large insitutional trading with decent size on.

Let me ask you this. I have a means of futures trading. Specifically long/short directional swing trading that has decent risk reward however has all the risks of trading flat price futures.. gaps blow ups, etc

I began to look into buying long only call or put pending my futures directional bias a small OTM delta like .25 or less ( instead of future which is 1 delta as you know) I have very little theta or some anyway because I use second month out i nthe curve as proxy for future. I do have the Vol. exposure being long, sometimes it may be high priced vol. realative to historic etc.

The best part about it, lets say my futures model is right only 40 percent time, well small delta allows me to take small loss, and if model is right, the OTM movs towards in the money and I really begin to lever" up as my direction is "right", and of course this means of trading has a specific exit point....

please rip it apart- ;) thank you
 
look at it another way....if you bought weekly options every week. i would guess you would most likely be a loser. you would periodically pay too much and also be hurt by execution fees.

not having done the math, i would guess you need a higher variance to lock in enough edge that would make it worthwhile.

therefore, execution strategies are a necessity. you must be able to get in an out efficiently to capture that perceived edge.
 
Quote from sle:

Obviously, it does not work all the time, but I have multiple strategies running at the same time, so I have the benefit of diversification. In anything, in a crisis I usually make money - 2011 was my best year, followed closely by 2008.

I can't get into specifics, but the whole idea is to identify rich risk premia and hedge them with cheaper risk premia. In some cases it is a different type of risk premium on the same product - e.g. I could be short gamma, but hold long-dated skew against it. In some cases it's a correlated product - I might be long variance on Russell and short variance on S&P500. In some cases, it's a farther removed risk factor - e.g. I could be short gap, but long vol-of-vol. And finally, in some cases, I am willing to take idiosyncratic risk in diversified form and hedge away systematic risk.
More...

thats pretty detailed to me :) relative pricing arbitrage in options... different types of risk premium ...
in the case of being short front month gamma against a longer dated skew is a bet in the short term distribution of a stock.. your betting that the relized vol in the shorter term will be less then the loss of skew value in the back.. an overall increase in vol will inflate the back skew but not necessarily the near dated short gammas .. an example of this is event trading..
correlation and dispersion is another way to arb relative pricing...
you could have shorted varience in the es against long variance in the nq going into earnings.. in a bunch of different ways.. variance swaps.. straddles.. strangle swaps..

you could as well take the idiosyncratic by going long apple variance/vol and short the index.. knowing that what seems like over priced pricing in aapl isn't.. then hedge your es options with es.. .. would have worked like a charm here..

Idiosyncratic .. just means there is something unique to the consitutient relative to its parent that can be arbbbeed..
 
Somewhat OT, but has anyone done extensive backtesting on options quote data and then subsequently live traded the strategy to come up with a reasonable heuristic for estimating fills from historical quotes? I'm guessing paying the full NBBO spread is too pessimistic...maybe 1/2 the spread?
 
Quote from cdcaveman:

thats pretty detailed to me :) relative pricing arbitrage in options... different types of risk premium ...
in the case of being short front month gamma against a longer dated skew is a bet in the short term distribution of a stock.. your betting that the relized vol in the shorter term will be less then the loss of skew value in the back.. an overall increase in vol will inflate the back skew but not necessarily the near dated short gammas .. an example of this is event trading..
correlation and dispersion is another way to arb relative pricing...
you could have shorted varience in the es against long variance in the nq going into earnings.. in a bunch of different ways.. variance swaps.. straddles.. strangle swaps..

you could as well take the idiosyncratic by going long apple variance/vol and short the index.. knowing that what seems like over priced pricing in aapl isn't.. then hedge your es options with es.. .. would have worked like a charm here..

Idiosyncratic .. just means there is something unique to the consitutient relative to its parent that can be arbbbeed..
More...


Out of curiousity- what does the risk reward look like on these, I.E lose 1 to make 2 or lose 1 o make 10 .. 20 , can you control your risk absolute ?

Thnx
 
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