IV vs HV

F

ferrycorsten

For IV30 vs HV30, if the difference is positive, that means the option turned out to be overpriced, and if the difference is negative, that means the option turned out to be underpriced, correct?

Assuming the above is true, how does HV play a role in option pricing when IV is always the measure of the true cost? What I'm trying to understand is, who cares about what HV turns out to be when it is IV that determines an option's price?
 
Quote from ferrycorsten:

For IV30 vs HV30, if the difference is positive, that means the option turned out to be overpriced, and if the difference is negative, that means the option turned out to be underpriced, correct?

Assuming the above is true, how does HV play a role in option pricing when IV is always the measure of the true cost? What I'm trying to understand is, who cares about what HV turns out to be when it is IV that determines an option's price?
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Personally, I couldn't care less about HV, but I'm pretty sure I'm in the minority on that issue.
I think some view it as a way to determine that they are timing a trade correctly and/or that they are essentially getting a good credit, if the current IV is higher than the HV.... or at least as high as it's average over the past year.

Personally, I think it's a useless and meaningless value, as there is NEVER any "context", of what was going on in the market, the sector or the company back then,... which caused the elevated or depressed HV back then.
What I find most amusing is, traders who value the past years HV for some reason, but think the past 3, 4 or 5 years is irrelevant, since it's not available.

The funny thing is, a year from now, future traders will think todays HV is some how more meaningful, than the current traders think it is.
LOL!
But like I said, I'm pretty sure I'm in the minority on this issue.
 
Quote from ferrycorsten:

For IV30 vs HV30, if the difference is positive, that means the option turned out to be overpriced, and if the difference is negative, that means the option turned out to be underpriced, correct?

Assuming the above is true, how does HV play a role in option pricing when IV is always the measure of the true cost? What I'm trying to understand is, who cares about what HV turns out to be when it is IV that determines an option's price?
More...

If IV is consistently higher than HV, then selling options will be profitable on average, because the underlying will not reach the extreme price levels anticipated by the IV.

Of course this is all on average. Momentary price moves could still take you out.
 
Quote from comintel:

If IV is consistently higher than HV, then selling options will be profitable on average, because the underlying will not reach the extreme price levels anticipated by the IV.

Of course this is all on average. Momentary price moves could still take you out.
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If you believe in the relationship between HV and IV, then it seems to me.... If current IV is higher than HV, then there is currently more uncertainty surrounding the stock, the stocks fluctuations will be more volatile, the trade is more risky, and the trades outcome.... more questionable.
 
Quote from Put_Master:

Seems to me if current IV is higher than HV, then there is currently more uncertainty surrounding the stock, the stock will trade more volatile, the trade is more risky, and the trades outcome.... more questionable.
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I said if it is consistently higher.

In other words, if, time and time again, over a long period, IV is higher than HV, the options sold during that period will be profitable (on average).
 
Quote from comintel:

I said if it is consistently higher.

In other words, if, time and time again, over a long period, IV is higher than HV, the options sold during that period will be profitable (on average).
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There is no such thing as a profitable option.
Only trades can be more or less profitable.
You can earn a higher credit with a higher IV, but that higher credit can still result in you losing money on the trade.
Why?
The higher the IV, the more uncertainty surrounding the stock, the more volatile it's fluctuations, the more risky the trade, and the "less likely" the trade is to be successful.
 
Quote from Put_Master:

There is no such thing as a profitable option.
Only trades can be more or less profitable.
You can earn a higher credit with a higher IV, but that higher credit can still result in you losing money on the trade.
Why?
The higher the IV, the more uncertainty surrounding the stock, the more volatile it's fluctuations, the more risky the trade, and the "less likely" the trade is to be successful.
More...

So? My statement is still correct.
 
Quote from cdcaveman:

Becareful..
Don't cross lakes that are on average 4 feet deep... one good blowout can set you u back decades
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True and I noted that.
 
Quote from comintel:

So? My statement is still correct.
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I don't think so.
Would you rather risk $10,000 on a trade to earn $1.00 on a more stable very high probability trade,... or would you rather risk $10,000 to earn $1.50 on a more volatile 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".
 
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