Volatility forecasting

E

erol

Hey,

so I thought the point of vol forecasting was to predict whch direction vol would go then place the appropriate strat (fly's, ratios) to profit fom this

I'm reading Sinclair's book, and it looks like it's more involved than that: delta neutral trading to lock in profits.

Was my initial assumption way off?

I was hoping to trade flys on sideways movng underlyings where I project the vol to stay flat or decrease. I was reading his book to learn how to project vol.

Thanks in advance
 
Quote from erol:
-----the point of vol forecasting
-----Sinclair's book
More...
Chapter-1, page-1:
When price goes up, implied volatility should go down.
When price goes down, implied volatility should go up.
The End. :cool:
 
Quote from erol:

Hey,

so I thought the point of vol forecasting was to predict whch direction vol would go then place the appropriate strat (fly's, ratios) to profit fom this

I'm reading Sinclair's book, and it looks like it's more involved than that: delta neutral trading to lock in profits.

Was my initial assumption way off?

I was hoping to trade flys on sideways movng underlyings where I project the vol to stay flat or decrease. I was reading his book to learn how to project vol.

Thanks in advance
More...

Sinclair's point about hedging your deltas back to neutral is that if you do that, and are correct about your vol forecast, you will probably make money.
 
so vol never increases when prices rise violently?

and if a stock is moving sideways, and whatever tool(s) i'm using indicate a drop in vol, that doesn't tell me anything about the fly's I want to trade?
 
Quote from erol:

so vol never increases when prices rise violently?

and if a stock is moving sideways, and whatever tool(s) i'm using indicate a drop in vol, that doesn't tell me anything about the fly's I want to trade?
More...

Implied vol could rise when prices rise violently but not often enough to profit from.

If you are expecting a drop in implied vol, my humble suggestions would be to sell iron condors (delta neutral to slightly positive), or trade your flies above the market. You could sell straddles or strangles if you are really careful and know the potential risks of being naked.
 
so if the underlying is going to sit there, vol won't change?

btw thank you all, i really appreciate the information, it's helpful
 
It's a very good book...

But predicting volatility is harder than predicting price... hard to find a book that delves into profitable volatility models..
 
Yep, filthy's book is really good.

Point is that he's talking about trading volatility, rather than delta. If you know how to forecast volatility (GARCH being an example of a very basic methodology), you can express a view.
 
Quote from psytrade:

It's a very good book...

But predicting volatility is harder than predicting price... hard to find a book that delves into profitable volatility models..
More...

I respectfully disagree. It is easier for me to trade volatility than to trade market direction of the underlying.
 
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