Two Beginner Questions On IV Please

[globalarbtrader]

Yea, in practice I've seen them set a baseline volatility based on realized, events, etc and then would adjust their implied around the baseline vol as described via inventories.

Another small point, even if your book isn't seeing any customer flow or potential news, you will still need to adjust your vega hedges as the book matures, the underlying spot moves, and the greeks change. So you may develop a short vol position in your book, and then axe your pricing to make it more likely someone will sell you a long vol position to bring your greeks back into line.

This is particularly important if your customer book consists of exotics which you are hedging with vanilla.

GAT

 

[ironchef]

(Used to be an interest rate options market maker)

How was market making, fun job? What were your reasons for leaving?

 

[globalarbtrader]

How was market making, fun job? What were your reasons for leaving?

No, not a fun job. Mentally challenging without being intellectually stimulating. Stressful. Long hours. Morally bankrupt. Everything you'd expect from a sell side trading job.

I guess that answers question 2: "What were your reasons for leaving?"

GAT

 

[tommo]

No, not a fun job. Mentally challenging without being intellectually stimulating. Stressful. Long hours. Morally bankrupt. Everything you'd expect from a sell side trading job.

I guess that answers question 2: "What were your reasons for leaving?"

GAT

love that quote ‘mentally challenging without being intellectually stimulating’ sums up 99% of corporate life.

 

[globalarbtrader]

love that quote ‘mentally challenging without being intellectually stimulating’ sums up 99% of corporate life.

Yeah, I also described it at the time as trying to do Sudoku puzzles really quickly whilst people shout at you.

GAT

 

[ironchef]

Mentally challenging without being intellectually stimulating. Stressful. Long hours. Morally bankrupt. Everything you'd expect from a sell side trading job.

GAT

Mentally challenging without being intellectually stimulating. Stressful. Long hours. Morally bankrupt. Everything you'd expect from retail trading.

Except we retail traders have more fun.

Best wishes to you sir.

 

[PoopyDeek]

Hi all,

I've been trading futures for a long time but want to diversify into options and have a couple of initial questions on IV.

1/ The IV displayed at each strike, as i understand it, is annualized, is there an online calculator etc to work out the expected move for the time remaining until expiration. Or is it just as simple as (IV/365)* Time to expiration?

2/ IV makes sense to me for ATM option, but i don't get how a strike price 10% away from current market price can have a similar IV to the ATM IV?

For example, assume the market is trading at 100 with IV of 10% so we expect the market to trade between 90 and 110 over next year.

But the strike price of 130 also has an IV of 10%.. how? That to me suggests the market expects the price to have a 10% move either side of a strike price 30% higher than where its currently trading. Wouldn't that mean the ATM strike would need an IV of 40% for both those things to be true? Hope that makes sense.

Thanks
Tom

2) Moneyness. The 10% vol-line won't result in the same price as the ATM. Obviously. Down and out index strikes are often double the vol-figure (of ATM). Look at a vertical strip of prices and IV on your front-end.

 

[globalarbtrader]

Mentally challenging without being intellectually stimulating. Stressful. Long hours. Morally bankrupt. Everything you'd expect from retail trading.

Except we retail traders have more fun.

Best wishes to you sir.

That's the nice thing about trading systematically. Developing new models is intellectually interesting, the hours are non existent, and there is zero stress.

Probably still morally bankrupt though. But less likely to cause systemic harm to the global economy and rip individual people off.

GAT

 

[Quiet1]

I think also, better not to think of IV as implying any sort of "move away from here". IV is a measure of dispersion of abs(return) not price. An IV of 16% implies about 68% of a day's returns in the stock will fall within ~+/- 1% of spot at the start of that day, ie within 1 standard deviation. Put another way, it does not mean that the market is expecting the stock to stay within 16% of current spot for the year, just that it would expect that on average 68% of annual returns would be within ~ +/- 16%. The 68% comes from the shape of the normal distribution.

 

[ironchef]

That's the nice thing about trading systematically. Developing new models is intellectually interesting, the hours are non existent, and there is zero stress.

Probably still morally bankrupt though. But less likely to cause systemic harm to the global economy and rip individual people off.

GAT

When it comes to trading, there is no such thing as zero stress, especially when we trade our own money, not OPM.

We retails are ripping people off too if we are profitable: ripping off fellow retail traders. Furthermore, I feel morally bankrupt, compare to the average US workers, working their tails off but only making peanuts.

OK, enough complains, back to printing money. Just kidding.