Implied Volitility

M

moolah

From my understanding of Implied volatility (IV), high IV means the stock price will fluctuate in a wider price range. This is compared to low IV where the stock price will fluctuate in a tighter price range. Therefore, one would think if you are a option buyer, you would favour option that have a high IV so as to increase the probability of your chosen strike price being hit. Likewise, if you are a option seller, you would favour options that have a low IV so as to decrease the probability of the strike price being hit. However, it seems that the options buyers prefer options with a low IV and options seller prefer options with a high IV.

Most grateful someone can explain this logic to me.
 
That is not the process I would use. Volatile stocks have options with higher Ivol, yes, but if the market is pricing options based on forward uncertainly correctly, excess returns are not likely. If you trade volatility, you need to have a process to predict when current prices are too low or too high compared to what will occur. This is not a typical retail strategy.
 
Expensive stocks are good companies so if you are buying a stock you want it to be expensive. ATM options have extremely high probability of hitting your strike lots of times so always buy ATM.
 
As a first concept, a high VI, means that there is more fear in the market, therefore, the prices of options will be more expensive motivated by this same uncertainty, so it is logical to be a seller of options.
In any case, this VI should be related to the historical or realised volatility, to determine whether the options are expensive or not.
 
Wish life is that simple.

IMHO, there is no advantage buying or selling high or low IV. Everything is priced in. You are essentially trying to find miss priced IV... and make money, it is very difficult for us amateurs without sophisticate models.

You make money when your opinion on certain company or event is different from everyone else's and you are right, like what happen to ABBV options recently after the purchase of AGN was announced.
 
moolah said:
From my understanding of Implied volatility (IV), high IV means the stock price will fluctuate in a wider price range. This is compared to low IV where the stock price will fluctuate in a tighter price range.
More...

Not "will" -- IV is the volatility after backing out the rest of option inputs from the option price -- it's the volatility *implied*by* the that price. So, it's the volatility of the underlying that the market *pricing* that option expects. At that moment. In that space. With the givens news, certainties, and UN-certainties.

If options are insurance {and they are} and volatility is risk {and it is}, "low IV" means that the market does not expect much flopitude beyond what might happen on any given day -- which means, if the market might move 1% on a fair pop of a day, and the market was not expecting much of anything at all (a "low IV" day) -- as an option seller, that day might've had your short positions SMACK in the money. :wtf::vomit::( But in a high IV environment, you'd be priced so far away from the market, that a 1% move would be a snorer. "Who cares?!?" :rolleyes::):thumbsup:

Low IV is a *miserable* state in which to sell options.
 
"In that case who is selling if I buy?"

A MM who is running a book of options and will neutralize as much of the risk as possible - today probably running a volatility book. Your trade is most likely to be done with a MM running a book. Customer crosses do happen, but not that often.
A fundamental seller using the option to do some form of asset allocation - especially with index options.
A speculator with a view of the underlying.
A spreader looking to complete a spread trade.
A size customer selling puts to acquire stock or calls as part of a covered write.
A size customer selling option to capture volatility in a delta neutral trade -especially with individual equity/ETF trades.
A couple dozen more choices, but most likely an MM running a book.
 
moolah said:
From my understanding of Implied volatility (IV), high IV means the stock price will fluctuate in a wider price range. This is compared to low IV where the stock price will fluctuate in a tighter price range. Therefore, one would think if you are a option buyer, you would favour option that have a high IV so as to increase the probability of your chosen strike price being hit. Likewise, if you are a option seller, you would favour options that have a low IV so as to decrease the probability of the strike price being hit. However, it seems that the options buyers prefer options with a low IV and options seller prefer options with a high IV.

Most grateful someone can explain this logic to me.
More...

Dude I created a volatility thread last week, you should of post your question there to bump up my numbers lolol jk,

But for real, your view on IV is spot on for a neophyte, but thats fine we all need to adapt or die.

With low IV the option premiums are too low, thus a seller can't sell anything with "juice", or anything worth the risk/reward. Also, just because IV is low doesn't mean it won't revert higher, vol "tends" to mean revert, but its not black and white. You need to study the particular vol of the underlying. Walmart vol (if there is such a thing) is vastly different than Tesla vol, and Tesla vol is vastly different than SPY vol, so it depends on the underlying too.

Theres much more to this discussion and I can go on forever.
 
ETJ said:
"In that case who is selling if I buy?"

A MM who is running a book of options and will neutralize as much of the risk as possible - today probably running a volatility book. Your trade is most likely to be done with a MM running a book. Customer crosses do happen, but not that often.
A fundamental seller using the option to do some form of asset allocation - especially with index options.
A speculator with a view of the underlying.
A spreader looking to complete a spread trade.
A size customer selling puts to acquire stock or calls as part of a covered write.
A size customer selling option to capture volatility in a delta neutral trade -especially with individual equity/ETF trades.
A couple dozen more choices, but most likely an MM running a book.
More...

Although I like this answer I think its quite irrelevant in 2019.

To sum up your post I would say "whos selling if I buy?": black-boxes in Carteret, New Jersey.
 
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