Selling ATM Straddles

[TraderMojo]

Quote from asap:

it is not.

Thank you asap. I know it's not. I was just curious to see how Div_Arb was going to dig an even bigger hole for himself.

 

[cdowis]

I suggest also comparing the ATM straddle with a calendar and a butterfly.

 

[Profitaker]

Shorting straddles = small but frequent profits, with occassional large losses.

Buying straddles = small but frequent losses, with occasional large profits.

Where implied vol = stat vol the expectancy over many, many trades, will be the same for selling straddles as it would be for buying straddles.

 

[nitro]

Quote from Profitaker:

Shorting straddles = small but frequent profits, with occassional large losses.

Buying straddles = small but frequent losses, with occasional large profits.

Where implied vol = stat vol the expectancy over many, many trades, will be the same for selling straddles as it would be for buying straddles.

Chage stat vol above and replace it with realized vol, and I believe that makes the above statement correct. Although the exactly correct statement is,

"Where implied vol function = stat vol function..."

This is because realized volatility is a function, whereas IV is a tangent line of an unknown function at one point in time.

nitro

 

[atticus]

Quote from nitro:

Chage stat vol above and replace it with realized vol, and I believe that makes the above statement correct.

nitro

Stat vol = realized vol.

This is because realized volatility is a function, whereas IV is a tangent line of an unknown function at one point in time.

This is wrong.

 

[nitro]

Quote from atticus:

Stat vol = realized vol.

The definitions that I use seem to be the standard ones. For example:

http://www.quantonline.co.za/Articles/article_volatility.htm

Go to section 4.3 and 5.

I quote:

4.3 Difference between Implied and Statistical Volatilities

Implied volatilities should be viewed differently from statistical volatilities even though they both forecast the volatility of the underlying asset over the life of the option. The two forecasts differ because they use different data and different models. Implied methods use current data on market prices of options, so the implied volatility contains all the forward expectations of investors about the likely future price path of the underlying. Also, due to the Black & Scholes assumptions this method assumes that the underlying’s price path is continuous. Contrast this with statistical methods which use historic data on the underlying asset returns in a discrete time model for the variance of a time series.

5 Realized/Actual Volatility

This is the historical volatility calculated looking “backward" when an option has expired. As an example, let’s say a trader wants to write an option today that expires in 3 months time. To estimate the volatility he/she might calculate the historical volatility of the past 3 months. If similar options are trading in the market he/she might calculate the implied volatility. The actual volatility will, however, only be known at expiry. Once the 3 months have passed, one can calculate the realized volatility (actual variance) between the original trade date and expiry because the actual price path is then known.

In any event, here is what I mean:

Actual/Realized volatility is the volatility you would get if you traveled into the future to expiration and you did a Historical Volatility measure.

Historical/Statistical Volatility is the volatility measure you get if you get historical data and compute the vol.

Implied Volatility is the volatility implied by the price of the option now.

stat = realized only at expiration.

There are a bunch of other "volatilities".

This is because realized volatility is a function, whereas IV is a tangent line of an unknown function at one point in time.

This is wrong.

This is absolutely correct.

nitro

 

[atticus]

Nitro, believe what you will. Belief doesn't make it so.

 

[nitro]

Quote from atticus:

Nitro, believe what you will. Belief doesn't make it so.

I realize that. But I am not trying to be obstinate. If you think I am in error, I would love to learn why!

Nothing is more interesting to me than to learn something new. I do not believe I am in error, but I learn a lot when I am wrong and realize it. I am willing to listen.

nitro

 

[MajorUrsa]

Quote from nitro:


Nothing is more interesting to me than to learn something new. I do not believe I am in error, but I learn a lot when I am wrong and realize it. I am willing to listen.

Yes, I'd be curious too. I see nothing evidently wrong in your definitions. Maybe the 'tangent' thingy is a bit dubious, but for the rest....

I always read realized vol as the historical (stat) vol at exp of the option, thus looking backward. Imp vol is not really vol but an expression of the current premium level in a handy format to compare with current and future (realized) vols.

As Nitro, always ready to learn some

Ursa..

 

[nitro]

Quote from nitro:

...
This is because realized volatility is a function, whereas IV is a tangent line of an unknown function at one point in time.

nitro

Actually, I think I did err, or at least the statement, while not wrong is also not exact. The correct statement I believe is:

"...realized volatility is a function, whereas IV is the osculating circle of an unknown function at one point in time."

The reason it is inacurate is because the tangent line only shares location and the first derivative with the curve, whereas the osculating circle in addition shares a second derivative with the curve.


nitro