Systematic Identification of Volatility Mispricing

Quantum-financier:

Canada - I am a student in a Canadian university currently completing my bachelor of commerce majoring in finance. I have a strong interest in market mechanics, statistics, machine learning, and their applications in quantitative trading strategies. With this blog, I hope to force myself to organize my thoughts in a clear and concise way. I also welcome the opportunity to share with other empirically minded bloggers and readers to improve my understanding of the market

http://etfprophet.com/author/quantum-financier/
 
sle, what is (c)?

oldnemesis, i found that method of his to be very useful in removing noise from a signal and since i learned that method from him, i should quote him. :)

Continuing...

For example,
is vix options vols cheap ahead of fomc?
1) historical/fundamental analysis
- tons of blogs (vixandmore, etc.) and academic papers that show that vix spikes into fomc mtg and tanks after that.
- vvix on fomc dates does seem cheap.
- vix vol term structure shows vix nov atm is lower than vix dec atm when usually its downward sloping. 61% ann. vol 3% daily with vxx3 @ 14.4 so going to 14/15?
- vix negative drift and spot < ux1, hence prob buy put

2) macro/sentiment
consensus is no taper and reenforcing previous commitments.
based on what they look at in the mtg mins, data certainly does not support taper and with recent govt shutdown, data impaired, housing just stabilizing, debt ceiling talks postphoned, nothing great. maybe taper will be even after Mar14.
hence vix vols are maybe not a buy for fomc.

3) technical analysis
typically force myself to read it although i am skeptical in general.

how can we screen more underlyings (EURUSD, USDEM, interest rates) rather than doing all these so manually with limited time? :confused:

please feel free to comment/critic/feedback. thanks.

nothing is much moving nowadays...crowded trades...bleeding...

disclaimer: i am a newbie here and in trading. Neither the information nor any opinion expressed in this post constitutes an offer or a solicitation of an offer to transact in any securities or other financial instrument.
 
question about backtesting:

lets say the algo enters an option trade but subsequently the underlying moves away (either otm or itm) from the option traded and there are no prices available. how do you calc pnl and risk then?

1) use exchange settlement price?
2) extrapolate the vol curve/surface and back out price? pnl swings very likely
3) use intrinsic value and ignore any optionality?
4) use put call parity? but it does not work when the other call/put is not quoted.

any other suggestions? pls feel free to comment/critic.

what are your preferences?

thanks,
lcs
 
Check the work of Robert Tompkins on normalized volatility surfaces. His work shows some evidence that these normalized surfaces are stable over time. Any deviation away from the surface could potentially be a mispricing.

Although to take advantage of this kind of mispricing in real time takes a lot of computing horsepower. Not really a game that a small firm or retail guy can play in.
 
Quote from panzerman:

Check the work of Robert Tompkins on normalized volatility surfaces. His work shows some evidence that these normalized surfaces are stable over time. Any deviation away from the surface could potentially be a mispricing.

Although to take advantage of this kind of mispricing in real time takes a lot of computing horsepower. Not really a game that a small firm or retail guy can play in.
More...

Danke! I will check out his work.
 
SPX vols down after the gd NFP and unemployment numbers. Are upside vols a buy now as a play on next week FOMC?
 
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