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is there a Volatility Doctor in the house?
- Thread starter increasenow
- Start date
Quote from erol:
i thought the theoretical price was based on HV?
and market prices were different (obviously) and from those you derive IV.
Why would market prices be different from theoretical price?
This is not obvious to me. If they are different this is an arbitrage opportunity that does not last long.
Theoretical price should be derived off some future volatility, probably it's estimate. Right?
Quote from gkishot:
Why would market prices be different from theoretical price?
It does not make a lot of sense to me. If they are different this is an arbitrage opportunity that does not last long.
Theoretical price should be derived off some future volatility, probably it's estimate. Right?
there's no arb since all options are quoted at a certain price based on supply/demand, which is reflected in the IV (market is implying vol to be X%).
Historically, underlying has had vol Y%, thus, if one uses this to forecast a vol, theoretically the option price is worth $z
before an earnings announcement, demand can rise, and so with respect to historical vol, the options are overpriced since the market is implying a large move. Theoretically though, the underlying shouldn't move that much, Since historically vol has been low. All of a sudden prices are inflated for something that didn't happen (yet).
Anyways, that's my understanding.
edit: i know you all know the earnings IV thing. I'm not saying i'm right just saying that's my understanding.
Quote from erol:
there's no arb since all options are quoted at a certain price based on supply/demand, which is reflected in the IV (market is implying vol to be X%).
Historically, underlying has had vol Y%, thus, if one uses this to forecast a vol, theoretically the option price is worth $z
before an earnings announcement, demand can rise, and so with respect to historical vol, the options are overpriced since the market is implying a large move. Theoretically though, the underlying shouldn't move that much, Since historically vol has been low. All of a sudden prices are inflated for something that didn't happen (yet).
Anyways, that's my understanding.
edit: i know you all know the earnings IV thing. I'm not saying i'm right just saying that's my understanding.
Can you clarify what you mean by demand/supply thing?
Do you mean their trading volume or what? What drives demand/supply? Wouldn't be it the notion that the option is underpriced/overpriced relative to upcoming move of the stock? Which in turn should adjust the option theoretical price according to the market's future volatility expectation. That's my understanding that the market price can't differ from it's fair theoretical price.
^ I can't tell if you're asking me b/c you want me to realize something, or if you're asking since you actually want to know my line of thinking.
Anyways, I'll quote spin for the explanation.
Basically, more buyers, higher demand, pushes prices higher.
Back to earnings. Everyone is all "OMG I like blackberry bold, I think it'll go up" so calls sky rocket since people are willing to pay the ask.
Edit: okay I see some additional writing,
I'm not sure, that makes sense.
Is there a right answer to this? Or basically we all have our opinions and those who are right are the ones making money?
Anyways, I'll quote spin for the explanation.
Quote from spindr0:
Option price is the equilibrium b/t supply and demand. If the ask is $2 and buyers come in, it rises (and vice versa for sellers).
If you iterate the option pricing components (other than vol) into a model, the result will be the implied volatility. People try to estimate future volatility but it's just that, an estimate. Future volatility is unknown. Implied volatility is a reflection of current prices.
Basically, more buyers, higher demand, pushes prices higher.
Back to earnings. Everyone is all "OMG I like blackberry bold, I think it'll go up" so calls sky rocket since people are willing to pay the ask.
Edit: okay I see some additional writing,
I'm not sure, that makes sense.
Is there a right answer to this? Or basically we all have our opinions and those who are right are the ones making money?
Quote from erol:
^ I can't tell if you're asking me b/c you want me to realize something, or if you're asking since you actually want to know my line of thinking.
Anyways, I'll quote spin for the explanation.
Basically, more buyers, higher demand, pushes prices higher.
Back to earnings. Everyone is all "OMG I like blackberry bold, I think it'll go up" so calls sky rocket since people are willing to pay the ask.
What if there are no buyers or sellers. The options are still quoted, right?
Based on their theoretical price and what market makers expect their future volatility should be, right?
Quote from gkishot:
What if there are no buyers or sellers. The options are still quoted, right?
Based on their theoretical price and what market makers expect their future volatility should be, right?
right... which is based on something near HV i thought...
Check out LQD for an example...
I know! since i lost coin on the low volume!
according to TOS, IV is 5.98% and HV is 5.33%
1 point is not a fair sample, but one that comes to mind that basically has no activity on it.