predicting volatility

ludmil · Jan 14, 2006

does anybody have data/experience/opinion how acurate is IV?is the market often right predicting the following moves of stocks?is predicting vol.(reversing to the mean)easier than predicting stock direction as often stated?

iloveoptions · Jan 14, 2006

Quote from ludmil:

does anybody have data/experience/opinion how acurate is IV?is the market often right predicting the following moves of stocks?is predicting vol.(reversing to the mean)easier than predicting stock direction as often stated?

My 2.5 cents on the issue... it's a coin toss at best over the long term. The best way is to develop your own volatility model totally independent of what you've learned in school or books. Extremely difficult and time consuming (years of hard work) to say the least. I did it though and it WORKS now.

www.collective2.com/go/optionstrader

ludmil · Jan 19, 2006

no opinions on volatility?i expected a long and hot threat

chiguy · Jan 19, 2006

judging future vol with other than histotical data is a lot like using an equalizer...

you can adjust the frequncy either plus or minus from a flat starting point...

inside the historical ranges are lots of little pops and bangs just like volume ranges in a piece of music...

not a great analogy but works for me...

MTE · Jan 19, 2006

My experience, and I got no hard data to back it up so if someone has evidence to the contrary then please correct me, is that, on average, the market prices the options right. So if you buy straddles on earnings then on average you'd be lucky to breakeven.

ludmil · Jan 19, 2006

Quote from MTE:

My experience, and I got no hard data to back it up so if someone has evidence to the contrary then please correct me, is that, on average, the market prices the options right. So if you buy straddles on earnings then on average you'd be lucky to breakeven.

how many years of experience do you have?
and what's between earnings?

fader · Jan 19, 2006

Quote from ludmil:

does anybody have data/experience/opinion how acurate is IV?is the market often right predicting the following moves of stocks?is predicting vol.(reversing to the mean)easier than predicting stock direction as often stated?

i thought the name of the game is to short volatility when it gets to an extreme high - no need to predict since it will mean revert...eventually - the key is to figure out how to manage risk properly when shorting it.

cnms2 · Jan 19, 2006

You're correct: all the information and probabilities are priced in the current options' prices. This is why any options strategy has the same theoretical expectancy 0 (zero) when ignoring slippage and commissions. To make money in options (except rare arbitrage situations) you have to forecast correctly the underlying price and/or implied volatility and chose an appropriate strategy. This choice also depends on how comfortable you are with the reward / risk characteristics of various strategies.

Quote from MTE:

My experience, and I got no hard data to back it up so if someone has evidence to the contrary then please correct me, is that, on average, the market prices the options right. So if you buy straddles on earnings then on average you'd be lucky to breakeven.

MTE · Jan 20, 2006

Quote from ludmil:

how many years of experience do you have?
and what's between earnings?

I've been trading for 3 years and studying options for 5.
I admit not a lot of experience, but this is what I have observed over time and what some of the more experienced traders that I have talked to have confirmed.

Earnings straddle was just an example.

I agree with cnms2, you need to be able to predict the direction of either price or volatility, sideways is a direction.

ludmil · Jan 21, 2006

Quote from cnms2:

You're correct: all the information and probabilities are priced in the current options' prices. This is why any options strategy has the same theoretical expectancy 0 (zero) when ignoring slippage and commissions. To make money in options (except rare arbitrage situations) you have to forecast correctly the underlying price and/or implied volatility and chose an appropriate strategy. This choice also depends on how comfortable you are with the reward / risk characteristics of various strategies.

i think i had your opinion on another threat-(and that of riskarb and other experienced traders too)-that's i want to discuss it more in debth.statistics is an interesting science!in average every american eats meat with pasta-but some have a lot of meat,other only pasta

)
if all the probalities are incorporated in prices you don't have to predict anything!i believe that theory is true often,but not always.after all the hype in the i-net buble don't tell me the market is always right!
high IV means that the market expects a big move!but acording to McMillan the market if often wrong!that's why he is advocating selling cautiously high vol.,and buying low one!
my question-do you agree?is he right or is this only theory wihout hold in real world?