Volatility quote trading?

D

DarkProtoman

Since an option's IV must decline to zero by expiration, why don't options traders just sell-to-open calls/puts, hedge by buying/shorting the underlying, and unwind the trade right before the option expires? Since the option at that point would have so little time value left, it's IV would have to be pretty small. Any losses from the option trade should be neutralized by the profit from the hedge.

Or they could just sell-to-open the front month call and put with the highest IV, and hedge any remaining delta with a few shares, and rebalance every day until expiration. I bet transaction cost would eat most of the profit, though.

Do you know of any services that provide live streaming IV quotes for trading volatility?
 
IV doesn't decline to zero as an option expires. The value of the option does, but not IV. Option pricing formulas have a separate time parameter, and most (simpler) models assume static IV.

As far as trading underlying, the no-arb proof for Black Scholes says exactly that: the value of an option should be equal to market expectation for losses from delta-hedging with the equivalent underlying. You have no edge from doing this, in theory at least.
 
Option IV does not decline to zero - it converges with realized volatility. There are many option traders who trade this relationship, but it has risks like any other trading method.
 
The volatility is zero on expiration and the value of the option is either 0 or S-K (for a call). But this doesn't say anything about the volatility right before expiration.
 
Quote from DarkProtoman:

Since an option's IV must decline to zero by expiration, why don't options traders just sell-to-open calls/puts, hedge by buying/shorting the underlying, and unwind the trade right before the option expires? Since the option at that point would have so little time value left, it's IV would have to be pretty small. Any losses from the option trade should be neutralized by the profit from the hedge.

Or they could just sell-to-open the front month call and put with the highest IV, and hedge any remaining delta with a few shares, and rebalance every day until expiration. I bet transaction cost would eat most of the profit, though.

Do you know of any services that provide live streaming IV quotes for trading volatility?
More...

Actant ,Option City and Spider Rock to name a few.They are not cheap to use. Figure between $3000-$5000 per month. Also, assume when you use these platforms as a "customer" and not Broker Dealer, then you have to claim "professional customer" status to avoid cancellation fees, make two sided markets and follow exchange rules. With the Pro-Cust. status, you lose your priority as customer on the book and pay higher fees at some exchanges. Volatility trading on an automated system creates hundreds of cancel/replace orders. The exchanges consider anyone that enters 390 orders per day on average, a pro-cust. That comes to 1 order per min. These platforms will also let you auto hedge.
 
Quote from DarkProtoman:

Since an option's IV must decline to zero by expiration, why don't options traders just sell-to-open calls/puts, hedge by buying/shorting the underlying, and unwind the trade right before the option expires? Since the option at that point would have so little time value left, it's IV would have to be pretty small. Any losses from the option trade should be neutralized by the profit from the hedge.

Or they could just sell-to-open the front month call and put with the highest IV, and hedge any remaining delta with a few shares, and rebalance every day until expiration. I bet transaction cost would eat most of the profit, though.

Do you know of any services that provide live streaming IV quotes for trading volatility?
More...


Pick up a few books on delta hedging, gamma scalping, and the like.... You should definitley educate yourself more before you start trying this.
 
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