Volatility is such a broad term

[Philo Judeaus]

I'm fascinated with volatility. The more I read, view, and $tudy it the more I don't know wth it is.

So I ask, what is volatility? How do you use it in your trading methodology?

How do you measure vol? What vol do you measure? Historical? Implied? Spot? Realized?

Do you look at term structure vol? Do you look at individual strikes implied vol?

Do you pay attention to the VIX? Do you pay attention to the VVIX? How about the RVX? Or maybe the VIN/VIF ratio?

How do you determine if IV is rich or cheap? Do you know how vol moves over-time? Some say IV is mean-reverting, some say high vol begets higher vol and low vol begets lower vol. What do you think?

Regardless of these questions I want to know what you think about vol, how do you incorporate it into trading decisions?

Theres many many ways to approach vol and I want to get a real discussion going so we can all build a foundation and learn.

 

[Robert Morse]

So I ask, what is volatility?

Uncertainly of future price movement.

When I traded, I compared the ATM option IVol with the S&P ATM vol and then monitored the option skew of individual stock options by looking at the difference between the .25 delta call and put vs each other and the ATM.

To me, this reflects market concerns or lack of it. I never traded indexes actively. I made markets in QQQ options for a short time but it was too efficient and I was not standing in that trading crowd so I had no access to broker orders.

 

[Philo Judeaus]

Uncertainly of future price movement.

When I traded, I compared the ATM option IVol with the S&P ATM vol and then monitored the option skew of individual stock options by looking at the difference between the .25 delta call and put vs each other and the ATM.

1. Uncertainty of future price movement yes.. but volatility is more about the magnitude of the movement, moreso than the movement (direction) itself?

2. When you say "IVol" do you mean implied vol? If so, implied vol of what?
And when you say S&P ATM vol are you talking about the ATM IV on SPX or SPY?

3. Also when looking at the ATM vol's are you looking at different durations (weeklies, monthlies)?

Cheers

 

[Robert Morse]

1. Uncertainty of future price movement yes.. but volatility is more about the magnitude of the movement, moreso than the movement (direction) itself?

2. When you say "IVol" do you mean implied vol? If so, implied vol of what?
And when you say S&P ATM vol are you talking about the ATM IV on SPX or SPY?

3. Also when looking at the ATM vol's are you looking at different durations (weeklies, monthlies)?

Cheers

Sorry for the brief answers, I’m responding on my phone.
#1-same thing to me.
#2-yes- I look at the skew curve and how it changes, but as I said I look at the ATM versus the 25 Delta puts and calls. Each week and each month that I want to trade. First 90 days would be my focus as it would include an earnings cycle. SPY, SPX, ES options- same S**T. All related so they have to be similar.
#3- as above, I always focused my risk on the near 90 days and traded smaller on the other months. I only traded leaps once because I also traded the warrant on that stock and the leaps were a good hedge.

My trading was never overly analytical. I try to keep everything very simple. I also tried to trade no more than 12 symbols at a time so I was very attuned to changes. I was very familiar with what volatility should be before during and after earnings and in relationship to market overall volatility/risk.

 

[Philo Judeaus]

My trading was never overly analytical. I try to keep everything very simple. I also tried to trade no more than 12 symbols at a time so I was very attuned to changes. I was very familiar with what volatility should be before during and after earnings and in relationship to market overall volatility/risk.

You speak in the past tense.. you don't trade anymore?

And when you did trade it was as a MM? Did you ever trade retail? Just curious.

 

[Philo Judeaus]

I look at the skew curve and how it changes, but as I said I look at the ATM versus the 25 Delta puts and calls.

So you'd look at the IV of the ATM strike then compare it to the IV of the 25 delta strikes?

Let me ask.. why 25 delta? Why not 5 delta? or 35? Arbitrary? Or was the 25 delta the delta you would trade if you saw an opportunity?

Thanks for the replies so far!

 

[Robert Morse]

You speak in the past tense.. you don't trade anymore?

And when you did trade it was as a MM? Did you ever trade retail? Just curious.

No, I do not trade anymore- trading requires time and focus and my time and focus is on sales. I have a few HF investments for my savings

I was an independent market maker on the floor of the American stock exchange from 1985 to 2010. I traded in the Apple crowd for most of that time. I call it the Apple crowd because for the majority of that time that was always the busiest option.

I never traded actively as a retail trader. I do more investing is small cap stocks in part of my Roth and traded some options on futures for a year in my Roth. Mostly crude. It was not worth my time. I think since I graduated from college in 1982 i maybe had a dozen transactions out side my BD or my retirement accounts.

 

[Robert Morse]

So you'd look at the IV of the ATM strike then compare it to the IV of the 25 delta strikes?

Let me ask.. why 25 delta? Why not 5 delta? or 35? Arbitrary? Or was the 25 delta the delta you would trade if you saw an opportunity?

Thanks for the replies so far!

I choose 25 delta because I find they provide the most information. Smaller delta options are too sensitive to the IVOL calculation. $0.05 vs $0.07 is only 2 cents but the math can lift the IVOl too much and not be meaningful. Experience mostly. I’m not overly analytical looking to maximize what strikes are best. Quick and dirty works better for me.

 

[Scataphagos]

I'm fascinated with volatility. The more I read, view, and $tudy it the more I don't know wth it is.

So I ask, what is volatility? How do you use it in your trading methodology?

How do you measure vol? What vol do you measure? Historical? Implied? Spot? Realized?

Do you look at term structure vol? Do you look at individual strikes implied vol?

Do you pay attention to the VIX? Do you pay attention to the VVIX? How about the RVX? Or maybe the VIN/VIF ratio?

How do you determine if IV is rich or cheap? Do you know how vol moves over-time? Some say IV is mean-reverting, some say high vol begets higher vol and low vol begets lower vol. What do you think?

Regardless of these questions I want to know what you think about vol, how do you incorporate it into trading decisions?

Theres many many ways to approach vol and I want to get a real discussion going so we can all build a foundation and learn.

In the most simple and broadest term... IMV the majority of market players refer to "volatility" as the likelihood of the VIX going up (market going down). And of course that can be played.

When the TV gurus advise, "buy volatility"... what they're saying is "go long the VIX" in some fashion.

 

[Philo Judeaus]

In the most simple and broadest term... IMV the majority of market players refer to "volatility" as the likelihood of the VIX going up (market going down). And of course that can be played.

When the TV gurus advise, "buy volatility"... what they're saying is "go long the VIX" in some fashion.

Thanks for the reply.

Although that is true I want to know what volatility means to your trading methodology? How do you use vol in your strategy?

The VIX is just one facet of volatility and that's why I titled the thread that way. Let's steer away from the VIX and get deeper discussions about vol instead of the "broad" mindset of vol just being where the VIX currently is.

Do you trade the VIX? Does anyone use the VIX as a hedge? An indicator? Does anyone here trade /VX? Does anyone pay attention to the /VX term structure? Does anyone here trade vol ETF's and ETN's?

I'm aware people on this forum do all the above I want to get a discussion going in this thread.