Buy put. Sell calls. Same difference.
Trading Volatility
- Thread starter ironchef
- Start date
Buy put. Sell calls. Same difference.
Expensive because IV is high.
It's a waste to be long vol when IV is topping.
Supposively volatility is easier to predict that spot price movements. Volatility is a mean reverting process that clusters where as spot price is quite random. If you are very good at predicting both, you should trade the spot price.
IV being high isn't the same as IV topping.
Right. There's a difference in height between a tall building and the tallest one. Knowing that the tallest is relative according to time. Which renders previous high stuffs a bit shorter. Relative to new highs.
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But when I examined underlying and IV, usually when underlying went down, IV went up, so often time a reversal of the underlying occurred when IV peaked.
Perhaps the market is efficient this way? At the resistance level and if the underlying is trending up a long position with high IV may still be profitable?
Of course it can be profitable to be long with a high IV. Lots of guy just don't care about IV and buy "expensive" options while making money. But you can loose money as well being right about the directional bias. Because of time and IV going against you.
Often as you say IV grows when a stock goes north. Then IV decrease down there when the stock consolidate. A risky strategy would be a risk reversal. You sell a put and buy the underlying. If it has effectively bottomed. However IV is an underlying in its own. As anything else, we don't know what truly makes it move. Traders buy and sell option, according to their inputs, expectations, needs. Which make IV goes up and down. However volatility is said to cluster, it's correlated over time. As someone already pointed out.
I see.
In layman's language, Go long on IV when it is low (compare to historical, actual), then hedge away the directional using delta hedge, one then has a high probability of profit?
Actually you should buy volatility if you think RV will be higher than the IV you are paying or if you think IV will rally. If it's low or high compared to historical isn't important unless that serves as a predictor to what realized vol will be in the future.
You can isolate the volatility component if you don't have a view on the delta.
IV and options can only be "relatively" versus where they have been in the past. We can be short volatility through short straddles, butterflys, calendars, etc. that have nothing to do with whether the stock price is high or low because a stock price is never high or low, we can only guesstimate whether it is relatively high or low compared to where it has traded in the past.
When a stock price is high and IV is high, as can occur right before earnings, buying puts is simply making a blind guess on direction that has nothing to do with options. GOOG often has had a high price and high IV before earnings and then gapped up 50 points and ran higher.
When a stock price is high and IV is high, as can occur right before earnings, buying puts is simply making a blind guess on direction that has nothing to do with options. GOOG often has had a high price and high IV before earnings and then gapped up 50 points and ran higher.