So, since index volatiliy is trading richly...

Quote from TskTsk:

Nice. I also found this graph lying around, from an old Goldman paper. The median spread is +2.7 percentage points from 89-05. It would be nice knowing the percentage spread in JGills data as well.

30D%20forward%20vol%20vs%20straddle.JPG
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when you say percentage points, it is synonomus with vol points, correct?

you want me to run the statistics on what i posted?

what is it you really want to know- how does this strategy perform if you sell vol when its >20? or what is your threshhold? i'll test it if i can, but i would honestly suggest you doing it yourself, for the sake of doing it - i normally do this stuff all day.

and honestly, the problem is that you can do this strategy and make money for a bit, but then your day of reckoning comes where you lose 20 vol. this is the type of strategy that is prone to blowing up.

also - is that data they show the implied vol vs forward realized, or the implied vol vs prior realized?
 
Quote from Jgills:

when you say percentage points, it is synonomus with vol points, correct?

you want me to run the statistics on what i posted?

what is it you really want to know- how does this strategy perform if you sell vol when its >20? or what is your threshhold? i'll test it if i can, but i would honestly suggest you doing it yourself, for the sake of doing it - i normally do this stuff all day.

and honestly, the problem is that you can do this strategy and make money for a bit, but then your day of reckoning comes where you lose 20 vol. this is the type of strategy that is prone to blowing up.

also - is that data they show the implied vol vs forward realized, or the implied vol vs prior realized?
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As said, the data is the same you posted, implied vol vs forward realized. And yes, "percentage points" refers to vol points.

I didnt ask you to test the strategy, just to post the percentage spread in your data because it might be interesting for people to know. But if you dont want to, thats fine.

Bottom line is the strategy makes money the majority of the time, with occasional large losses. Personally I dont believe the large losses are enough to "blow up" an account if they are managed correctly. But that's just me.
 
Quote from TskTsk:

As said, the data is the same you posted, implied vol vs forward realized. And yes, "percentage points" refers to vol points.

I didnt ask you to test the strategy, just to post the percentage spread in your data because it might be interesting for people to know. But if you dont want to, thats fine.

Bottom line is the strategy makes money the majority of the time, with occasional large losses. Personally I dont believe the large losses are enough to "blow up" an account if they are managed correctly. But that's just me.
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ok - here are the descriptive stats:

average spread: 0.7%
median spread: 2.6%
stdev of spread: 8.79%

and you're right, i know nothing about the trader implementing it, their size, or their expierence.
 
If selling gamma is your only strategy, you very well might blow up, even if you do it at what seems to be opportune moments. You look at your vol cone (or whatever you like as a vol analysis) and say - oh, implied vol is at 90th percentile, let me sell some 1m straddles. Next thing you know, vols move to 95th percentile and you lock in a large loss.

If anything, selling vega at the time of high implied volatility is the way to go - most of your losses are MtM and if you the kind of guy that can withstand some pain, once the volatility is lower, you just buy them back. There is not enough gamma to kill you and make it a realized gain, but you have to be capitalized well enough to withstand the pain along the way. The strategy requires you to understand the dynamics of implied vol, have a feel for the flows and otherwise be comfortable with carrying the position that is driven mostly by supply-demand, not by intrinsic or theta.
 
Quote from sle:

If selling gamma is your only strategy, you very well might blow up, even if you do it at what seems to be opportune moments. You look at your vol cone (or whatever you like as a vol analysis) and say - oh, implied vol is at 90th percentile, let me sell some 1m straddles. Next thing you know, vols move to 95th percentile and you lock in a large loss.

If anything, selling vega at the time of high implied volatility is the way to go - most of your losses are MtM and if you the kind of guy that can withstand some pain, once the volatility is lower, you just buy them back. There is not enough gamma to kill you and make it a realized gain, but you have to be capitalized well enough to withstand the pain along the way. The strategy requires you to understand the dynamics of implied vol, have a feel for the flows and otherwise be comfortable with carrying the position that is driven mostly by supply-demand, not by intrinsic or theta.
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How far out would you go? Got any positions right now?
 
First excuse my noobness.
Looking at babutime's attached diagram it has reminded me a post that has confused me about comparing HV/RV:

http://www.wilmott.com/messageview.cfm?catid=8&threadid=77678

Poster acastaldo seems to me to confirm that calulated HV is lagging behind IV and a better approach is to "backdate" the IV (this is my interpretation which might not be correct)

My point is that in babutime's pic, the spikes that you see may not be that big but it is the result of not adjusting for the "lag" between HV and RV ?

So if anyone more knowledgeable could have a look at the link and shed some light on what is the best methodology to follow, that would be great!
 
Quote from sle:

If selling gamma is your only strategy, you very well might blow up, even if you do it at what seems to be opportune moments. You look at your vol cone (or whatever you like as a vol analysis) and say - oh, implied vol is at 90th percentile, let me sell some 1m straddles. Next thing you know, vols move to 95th percentile and you lock in a large loss.

If anything, selling vega at the time of high implied volatility is the way to go - most of your losses are MtM and if you the kind of guy that can withstand some pain, once the volatility is lower, you just buy them back. There is not enough gamma to kill you and make it a realized gain, but you have to be capitalized well enough to withstand the pain along the way. The strategy requires you to understand the dynamics of implied vol, have a feel for the flows and otherwise be comfortable with carrying the position that is driven mostly by supply-demand, not by intrinsic or theta.
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How do you short vol? Short VIX futures, long VIX calendars, use VIX options, gamma-delta neutral short SPX time spreads?

All those have time limitations - would you roll forward? You could short VXX and keep it for a while.

I just want to short cash VIX and hang on to it, but it's impossible.
 
Quote from kapw7:

First excuse my noobness.
Looking at babutime's attached diagram it has reminded me a post that has confused me about comparing HV/RV:

http://www.wilmott.com/messageview.cfm?catid=8&threadid=77678

Poster acastaldo seems to me to confirm that calulated HV is lagging behind IV and a better approach is to "backdate" the IV (this is my interpretation which might not be correct)

My point is that in babutime's pic, the spikes that you see may not be that big but it is the result of not adjusting for the "lag" between HV and RV ?

So if anyone more knowledgeable could have a look at the link and shed some light on what is the best methodology to follow, that would be great!
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The chart babu posted is adjusted for the lag, or backdated, and is thus the more correct way of representing implied vs realized.
 
Quote from TskTsk:

The chart babu posted is adjusted for the lag, or backdated, and is thus the more correct way of representing implied vs realized.
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Cool, thanks. I've read the top header of his chart but wasn't sure.
 
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