IV vs HV

Quote from Put_Master:

........
Would you rather risk $10,000 on a trade to earn $1.00 on a very high probability trade,... or would you rather risk $10,000 to earn $1.50 on a very low probability trade?

I would focus more on the "probability" of the trade being successful, vs merely the "potential" for a larger profit...... if successful.
The issue is "probability vs potential".
More...

I agree on that actually.

But I think it is very useful to compare IV with HV.

When you see IV higher than HV, there is the *potential* for a trade there, but you have to ask yourself , is the IV maybe high for a good reason (as you pointed out earlier). If so, of course you do not want to sell it (as part of a spread or otherwise - I am not advocated naked option sales).
 
Quote from comintel:

I agree on that actually.

But I think it is very useful to compare IV with HV.

When you see IV higher than HV, there is the *potential* for a trade there, but you have to ask yourself , is the IV maybe high for a good reason (as you pointed out earlier). If so, of course you do not want to sell it.
More...
I would agree with most of that.
But I'm not saying don't sell if the IV is high.
I'm only saying not to use a high IV as justification for selling, just because the IV and credit is high.
It's high for a reason.

There is nothing wrong with looking at HV.
My issue is with traders who think someone is making a poor trade, because the current IV is lower than HV.
In reality, it may be a better trade (a higher probability outcome), because the stock is currently less volatile and more stable than it's been in the past.

I think if traders took the time to go waaaay back, and read the news from 1 - 1.5 years ago, when the HV was so high.... chances are many would NOT want to invest in the company at that time.
 
Quote from Put_Master:

I would agree with most of that.
But I'm not saying don't sell if the IV is high.
I'm only saying not to use a high IV as justification for selling, just because the IV and credit is high.
It's high for a reason.

There is nothing wrong with looking at HV.
My issue is with traders who think someone is making a poor trade, because the current IV is lower than HV.
In reality, it may be a better trade (a higher probability outcome), because the stock is currently less volatile and more stable than it's been in the past.

I think if traders took the time to go waaaay back, and read the news from 1 - 1.5 years ago, when the HV was so high.... chances are many would NOT want to invest in the company at that time.
More...

Good point.....
 
In single stock, IV/RV ratio is frequently misleading - high IV to RV ratio can be indicative of an upcoming event, while low IV to RV ratio can mean that an event has just passed and there is nothing to worry about.
 
Quote from sle:

In single stock, IV/RV ratio is frequently misleading - high IV to RV ratio can be indicative of an upcoming event, while low IV to RV ratio can mean that an event has just passed and there is nothing to worry about.
More...

plus Averaging realized vol over time smooths out jumps.. the more and more time you include in your "average" the less and less jumps appear...
i know you know this.. just adding to what your saying

i've always thought about what if you took out the jumps from earnings and avoidable events... then re evaluated the IV/RV ratio..
 
Can't issues other than earnings affect IV, such as stories of litigation..., pending approvals of.... not getting approvals for... senior management officials getting ill... senior management stepping down,...a competitor coming out with... the govenrment investigating.... losing a major client due to.... unexpected massive insider selling,... a takeover or merger that fell apart... over seas civil unrest resulting in... some issue related specifically to the "sector" the company is tied to... analyst downgrades due to....
The list goes on and on.
Nor do you know "for how long a period", a single or perhaps multiple issues, may have negatively affected the companies stock.
The point being, if you don't know what caused the higher or lower IV in the past, I don't see the value in comparing todays IV to the HV.
What may have occured in the past may be extremely unlikely to occur again.
 
Quote from cvds16:

HV was never important for me; however future realised vol versus implied vol was very much so if you delta hedge ...
More...

Yes but one (realized) becomes the other (historical) with the passage of time, does it not?

Or to put it another way, back data on realized volatility is called historical volatility.
 
you are right, yet you are not entirely so ... it's only after the fact it becomes historical vol. ... before the fact you call it future vol. ... as a delta neutral hedger you are basically trading future vol, not historical vol. ....
 
You must log in or register to reply here.
Back
Top