IV to Estimate Future Price Range

T

Tahoe_Brent

I have a wireframe mock-up chart that plots a traditional chart with an underlying's history, but attaches its future expected range on the right, using IV.
http://youtu.be/mUvRA3O1mTw
The IV price range would change (up/down), based on:
1. The desired future period (eg, 1, 2, 3 mos, etc.) - the longer the period, the greater the range grows with time.
2. Which options are used to assign IV to the underlying (eg, using the front month's @TM P/Cs, or weighting same for several mos).
Any feedback would be appreciated.

Brent
 

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good effort, i have a question:

-When you created this did you consult the literature on extracting expectations from options prices / is it consistent with those methods.

I think you might get buyers, the normal distribution fetishists. But on a conceptual level i disagree that it will be very helpful for someone trying to trade the underlying. Principally because in order for the options market to have a vastly skewed expectation of a price movement without the price moving much would only happen immediately prior to a takeover AND where parties with inside information are very large relative to the options market OR that includes the liquidity providers. Anyway these occurrences would only last a matter of minutes, rather than on a close-close basis.

So basically i disagree with your interpretation of IV, although it is one of many perfectly reasonable interpretations. I'm sorry this isn't more constructive criticism but i'm not very good.
 
I've been trading using that basic idea for over 10 years. It works OK for the right stocks but has severe limitations which you better be aware of or you will get killed.

Most importantly you need to have some assurance that the company is going to continue 'as is' for the expected duration of the trade and will not have any extraordinary events in either the company or the market as a whole to make your assumptions invalid... i.e. a black or white swan.

Stable stock, stable market, no swans.
 
ATM Straddle * 1.25 = ~ 1 Standard Deviation Expected Move


Quote from atticus:

I use ATM vol to produce OTC straddle ranges plotted in R/T. Helps when you visualize/conceptualize the vol figure.
More...
 
Quote from Tahoe_Brent:

I have a wireframe mock-up chart that plots a traditional chart with an underlying's history, but attaches its future expected range on the right, using IV.
http://youtu.be/mUvRA3O1mTw
The IV price range would change (up/down), based on:
1. The desired future period (eg, 1, 2, 3 mos, etc.) - the longer the period, the greater the range grows with time.
2. Which options are used to assign IV to the underlying (eg, using the front month's @TM P/Cs, or weighting same for several mos).
Any feedback would be appreciated.

Brent
More...

Did you try to get a second expert opinion on some of what is said in that video?
 
Quote from Tahoe_Brent:

I
The IV price range would change (up/down), based on:
1. The desired future period (eg, 1, 2, 3 mos, etc.) - the longer the period, the greater the range grows with time.

Brent
More...

Another point: what do you do if the months do not have equal implied volty? Extreme examples: What if 1 month implied volty = twice the 4 month implied?
 
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