Implied Volatility vs. Real Volatility

Quote from justrading:

Thanks. I understand why there is skew, but it's nice to see graphical depictions of different skews on the same page. This is the same as Hoadley's 3D volatility surface, but I think easier to see variances across many expiries, at least for me.

I'm not some market wizard, so for me to say any IV is too high or low, I would have to compare to historical IV, which brings us back to my original question way back about using historical IV and data services for this.

Livevol looks nice, probably not as clunky as Hoadley.
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livevol.. is 250 a month if you don't trade with them.. i reallly don't think there is edge in just looking at historicals/ implieds... sure theres some merit to knowing that.. but the implieds many times are valued quite well to realized/historic... historic is just looking at what happened.. implieds relative to historics look off alot.. because of implied jumps at earnings/events etc.. i do think livevol is a pretty nice deal but you still have to know what your looking at, and what your looking for..

one thing i didn't get when i first looked at the smiles/smirks across time .. like in hoadly is this.. the smiles can be quite the same if your adjust for time..... meaning just because the near term options look like they are smiling more doesn't mean shit... because if you took the back months and adjust for time they will look like the fronts.. the distance between the strikes is wider between fronts and backs if not adjusted for time.. i don't know if you get that but its like this... one week left.. a five wide strike isn't that big of a move but 3 weeks left a five wide is even a smaller bit of variance.. say we are talking apple..

when i first looked at it.. i was like oh shit why does it seem the front is so much expensive.. and the implied numbers of the same strike go up as you get closer to expiration... but NOT if you adjust for time... if you graphed a 20 delta put across the term structure it would look quite different then if you just took a strike that was 20 dollars out of the money and looked across the term structure..
 
Quote from comintel:

You can see a lot of it at the links I posted at
http://www.elitetrader.com/vb/showthread.php?s=&postid=3727526

The book is a duplicate of a lot of this material. It is very intense mathematically.
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thanks Comintel... and even more so for a guy like me who is 35 in his first calculus class as we speak.. haha i'm not scared though.. you just let it seep into you... I enjoy the process. i try to not get mixed up with the math.. extract the concepts.. after a while of looking at these equations it doesn't look so unfamilar.. i have to get the concept of what the math is trying to accomplish, or its complete spaghetti to me.. i'm going through that thread now ..
 
Quote from cdcaveman:

livevol.. is 250 a month if you don't trade with them.. i reallly don't think there is edge in just looking at historicals/ implieds... sure theres some merit to knowing that.. but the implieds many times are valued quite well to realized/historic... historic is just looking at what happened.. implieds relative to historics look off alot.. because of implied jumps at earnings/events etc.. i do think livevol is a pretty nice deal but you still have to know what your looking at, and what your looking for......
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Agreed.

I think that some systematic study using a programming language and relatively simple historical data is going to pay off a lot more than looking at beautiful live graphs of n'th degree derivatives.......except of course for market makers.........
 
Quote from comintel:

Agreed.

I think that some systematic study using a programming language and relatively simple historical data is going to pay off a lot more than looking at beautiful live graphs of n'th degree derivatives.......except of course for market makers.........
More...

yeah ... coming up with ideas to exploit phenomenon is another task.. i remember i was sitting there writing over and over and over again about earnings trades.. and blasting my brain to figure out a sensible exploitation of the implieds... then after reading some it hit me.. sell the front that isn't in the earnings month.. buy the earnings month! plus most crazy complex models go out the window with traders... your always wanting relative value.... playing skew in alot of senses is a relative value exploit.. same with dispersion skew trades... theoretically.. the index should exhibit the same skew as the sum of all its parts.. but IT DOESN'T... i don't wanna ever get lost in deep math space.. reality is messy..
 
Quote from cdcaveman:

livevol.. is 250 a month if you don't trade with them.. i reallly don't think there is edge in just looking at historicals/ implieds... sure theres some merit to knowing that.. but the implieds many times are valued quite well to realized/historic... historic is just looking at what happened.. implieds relative to historics look off alot.. because of implied jumps at earnings/events etc.. i do think livevol is a pretty nice deal but you still have to know what your looking at, and what your looking for..

one thing i didn't get when i first looked at the smiles/smirks across time .. like in hoadly is this.. the smiles can be quite the same if your adjust for time..... meaning just because the near term options look like they are smiling more doesn't mean shit... because if you took the back months and adjust for time they will look like the fronts.. the distance between the strikes is wider between fronts and backs if not adjusted for time.. i don't know if you get that but its like this... one week left.. a five wide strike isn't that big of a move but 3 weeks left a five wide is even a smaller bit of variance.. say we are talking apple..

when i first looked at it.. i was like oh shit why does it seem the front is so much expensive.. and the implied numbers of the same strike go up as you get closer to expiration... but NOT if you adjust for time... if you graphed a 20 delta put across the term structure it would look quite different then if you just took a strike that was 20 dollars out of the money and looked across the term structure..
More...

I have seen the graphs for how IV spikes coming into expiry.

Re the 5 wide strike 1 week and 3 weeks to expiry, are you referring to the basic pricing theory that says the chance of realizing say a 2 standard deviation move is greater 3 weeks out than it is 1 week out? If so then that part I get pretty easily because of all the time I have been swing trading. If I want to get a 5 or 6 ATR move in the underlying, I'll have to wait a lot longer than if I am targeting a 2 ATR move, what with the ebb and flow of the market.
 
Quote from cdcaveman:

yeah ... coming up with ideas to exploit phenomenon is another task.. i remember i was sitting there writing over and over and over again about earnings trades.. and blasting my brain to figure out a sensible exploitation of the implieds... then after reading some it hit me.. sell the front that isn't in the earnings month.. buy the earnings month! plus most crazy complex models go out the window with traders... your always wanting relative value.... playing skew in alot of senses is a relative value exploit.. same with dispersion skew trades... theoretically.. the index should exhibit the same skew as the sum of all its parts.. but IT DOESN'T... i don't wanna ever get lost in deep math space.. reality is messy..
More...

I have not looked at this at all to be honest, but are you saying that higher expected IV is typically not priced into the earnings months? That seems counterintuitive.
 
Quote from justrading:

I have seen the graphs for how IV spikes coming into expiry.

Re the 5 wide strike 1 week and 3 weeks to expiry, are you referring to the basic pricing theory that says the chance of realizing say a 2 standard deviation move is greater 3 weeks out than it is 1 week out? If so then that part I get pretty easily because of all the time I have been swing trading. If I want to get a 5 or 6 ATR move in the underlying, I'll have to wait a lot longer than if I am targeting a 2 ATR move, what with the ebb and flow of the market.
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why do implieds of the same strike go up as you get closer to expiration..
 
Quote from justrading:

I have not looked at this at all to be honest, but are you saying that higher expected IV is typically not priced into the earnings months? That seems counterintuitive.
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no.. your buying the month that earnings will be in.. your selling the month in front..

say apple reported jan 23... you buy the 25th expiration.. you sell the previous.. the 18th.. .. the previous expiration doesn't include the implied jump for earnings.. it just loses value while the one that does include the jump holds its value.. its relative value trading..
 
Quote from cdcaveman:

why do implieds of the same strike go up as you get closer to expiration..
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McMillan does not say why, though he does provide graphs and data to illustrate his point.

In Options as a Strategic Investment he says, "It's important for anyone using implied volatility in his trading decisions to understand that the range of past implied volatilities is important, and to realize that the volatility range expands as time shrinks.

He graphs scatter plots, but if they were line graphs they would look like a squid, long narrow body with tentacles spread out into expiration.
 
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