Volatility trading IS directional

[newwurldmn]

It does, plus the CBOE VIX options have to be timed almost right on the dot. These options can be 6.00 ITM yet still be traded at prices significantly less. Not saying I don’t like using them ever but, timing can be an issue.

I’ve always kind of thought all volatility strategies though are higher cost, or tie up a bit of capital for the potential returns.

I would tend to agree that volatility strategies are capital inefficient. It used to be that there was a lot of edge in typical vol strategies but most of it went away when market access improved and computation costs came down.

 

[eves_banished_children]

I would tend to agree that volatility strategies are capital inefficient. It used to be that there was a lot of edge in typical vol strategies but most of it went away when market access improved and computation costs came down.

Taken to the n'th degree, does that mean the future is zero volatility and perfect efficiency in markets with zero spread ?

 

[TheBigShort]

A common trade is SPX volatility vs SX5E volatility. You would delta hedge to isolate the vol risk.

Other times I have done spread trades where I don't delta hedge the position.

At the end of the day, there are two reasons to "spread:"
1. To trade the relative value of two assets
2. To isolate a risk factor (or hedge out a risk factor).

Trading SPX/SX5E is an example of #1.
Trading a calendar spread is an example of #2 where you want to isolate the forward vol.

When you say forward vol. Do you mean future implied vol? Because realized vol would hurt a calendar spread

 

[newwurldmn]

When you say forward vol. Do you mean future implied vol? Because realized vol would hurt a calendar spread

Yes. For example the expected 3month implied vol 3 months from now

 

[TheBigShort]

I would tend to agree that volatility strategies are capital inefficient. It used to be that there was a lot of edge in typical vol strategies but most of it went away when market access improved and computation costs came down.

newwurld. Right now AAPL front month has really low vol against the DJX. The spread is at the lower bound. How can I go about trading this if I think there will be an increase in the spread. Should I buy a calendar on AAPL and sell a calendar on DJX?

 

[newwurldmn]

newwurld. Right now AAPL front month has really low vol against the DJX. The spread is at the lower bound. How can I go about trading this if I think there will be an increase in the spread. Should I buy a calendar on AAPL and sell a calendar on DJX?

Buy Apple vol and sell djx vol. you could do it as a calendar or two straddles.

 

[OptionsOptionsOptions]

..... Right now AAPL front month has really low vol against the DJX......

• GOOGL also has low volatility - might be lower than AAPL.
• GOOGL is also well below its all time high - while AAPL is close to its all time high.
• IMO ..... GOOGL has more upside than AAPL.

 

[ironchef]

• IMO ..... GOOGL has more upside than AAPL.

Agree.

Today yes, a month ago, no.

Timing is everything.

By the way, your long OTM strategy is very interesting, again, timing is important?

 

[fyretrading]

the correlation isn't close to 1 http://www.macroption.com/vix-spx-correlation/

 

[rvince99]

Hey everyone, when we look at the correlation between price and vol it is very close to 1.

Careful with that axe, Eugene. It depends on the time window one uses to measure the correlation. The shorter the time frame, the more that the correlation flips--goes positive for short periods of time. These have historically marked good interim turning point s in the markets, and might be used as a basis for putting on your strategy.