Options Education - Got a Website / Book / PDF You Like? Post It Up
- Thread starter easymon1
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I know IV and Vega are different but concerning volatility...Who sets/determines IV? Is there a set formula MM or brokers abide by?
Could you please elaborate a bit? I read a lot but My book queue is pretty long so if any books by either of those authors stand out as exceptional it would help.
Sure
Sheldon Natenberg - Option Pricing and Volatility
Jeff Augen - The Volatility Edge in Options Trading
Jeff Augen - Trading Options at Expiration
Euan Sinclair - Positional Option Trading
Euan Sinclair - Option Trading: Pricing and Volatility Strategies and Techniques
Dan Pasarelli - The Market Taker's Edge
Anthony Saliba - Option Trading Strategies for Directionless Markets
Allen Baird - Option Market Making
I'd say these 8 books will pretty much give you a pretty solid understanding of trading options, their risks, how structure works for various spreads, the concept of trading volatility, and a good understanding of what the market makers or those taking the other side of your trades are doing. If you want to trade expiration day stuff the Augen book is pretty solid.
Natenburg is probably the first author to put it all together. I'd say Sinclair is probably my favorite I think he has a gift for explanation and a certain amount of wit and humor in his writing. Saliba and Pasarelli are former floor traders as well as Baird a former market maker.
Nobody "sets" IV.
Stock trades at 50$, 55 Call with 90days to expiry costs 4.20 USD
The 60 strike with the same expiry costs 2.20 USD
Another stock trades at 300$, the 400$ call with 60 days to expiry costs 0.20 USD
Now you tell me which option is cheap and which one is expensive. Right, you cannot. Because you're missing a framework that gives these options a common denominator.
The framework is called Black Scholes for European style options and Cox - Rubinstein for American style options.
The common denominator is called implied volatility which is the volatility that is implied by the options price.
Honestly speaking you should stay away from options if you don't even know the most basic concepts and terms. Because these non - linear instruments got one or the other nasty surprise for you
nah ill keep trading options because I like them.
I think my question was more of...is IV based on a standard formula across the board for all options? What is the relationship between IV and standard deviation? for example/what i am guessing...IV is determined not only from price (like you mentioned), but also price movement no? obviously the more volatile the underlying the higher the IV and premium...I am interested to see the formula for determining IV like...if underlying reaches 2SD in X time period -> IV moves to X%.
Sorry for the jumbled reply i obviously don't really know what i am talking about so difficult to word the question properly.
In the mathematical sense it's precise, as it is simply a claculation based on vol, agreed. After 20 years of WTF moments, I take Vega with a pinch of salt but I'm not trading a 7 figure account these days. Also I do not trade options in isolation but in combinations. Given spreads can be as wide as a London bus, the Greeks are more of a code or guidelines.
It really depends on what you're trying to do.
If all you trade is front month verticals, i.e. you're using options spreads as a way to trade delta I more or less agree.
However, it ends right there. All other combinations and especially the market neutral ones are really subject to changes in the price of optionality which basically is IV.
On top of that, IV changes your delta profile, meaning that if you for example buy a +gamma call spread and IV goes down, your delta goes up which increases your risk. As soon as the market trades towards your short strike and IV increases, your delta decreases.
The more you go out in time, the more prominent these IV changes will be.
So absolutely do not discard these variables as meaningless, because they have a huge influence on your performance