volatility trading

D

Dennish2o

Hello everyone,

in our finance project in our master's course, we are asked to come up with a sophisticated idea about volatility trading...

1.)How can you make profit when vol. is high/low?

Our thoughts focused on trading volatility indices like the VIX (Chicago Board Options Exchange Market Volatility Index) or the VXN (CBOE NASDAQ Volatility Index). We also thought of Straddles, Strangles and Butterflies...

The question is:
What product would a practitioner use/recommend?

2.) I think one thing is still more important than the product:

WHAT is a good trading strategy, considering volatility???
This is our second question!!!

We were thinking of an event study...
Hypothesis1: Right after an announcement (e.g. labour figures/CPI/...), vol. should increase
Hypothesis2: if implied vol. crosses its 20days ewma, you should hold a position for 5days (either short or long, depending on crossing direction)

What are your thoughts, opinions and recommendations about that???


Thank you for your ideas in advance
Dennis
 
Quote from Dennish2o:

Hello everyone,

in our finance project in our master's course, we are asked to come up with a sophisticated idea about volatility trading...

1.)How can you make profit when vol. is high/low?

Our thoughts focused on trading volatility indices like the VIX (Chicago Board Options Exchange Market Volatility Index) or the VXN (CBOE NASDAQ Volatility Index). We also thought of Straddles, Strangles and Butterflies...

The question is:
What product would a practitioner use/recommend?

2.) I think one thing is still more important than the product:

WHAT is a good trading strategy, considering volatility???
This is our second question!!!

We were thinking of an event study...
Hypothesis1: Right after an announcement (e.g. labour figures/CPI/...), vol. should increase
Hypothesis2: if implied vol. crosses its 20days ewma, you should hold a position for 5days (either short or long, depending on crossing direction)

What are your thoughts, opinions and recommendations about that???


Thank you for your ideas in advance
Dennis
More...

Hypothesis 1: vol will already have the announcement priced in

Taking a look at how IV reacted around earnings both before and after might give you some ideas.
 
Quote from Dennish2o:

Hello everyone,

in our finance project in our master's course, we are asked to come up with a sophisticated idea about volatility trading...

1.)How can you make profit when vol. is high/low?

Our thoughts focused on trading volatility indices like the VIX (Chicago Board Options Exchange Market Volatility Index) or the VXN (CBOE NASDAQ Volatility Index). We also thought of Straddles, Strangles and Butterflies...

The question is:
What product would a practitioner use/recommend?

2.) I think one thing is still more important than the product:

WHAT is a good trading strategy, considering volatility???
This is our second question!!!

We were thinking of an event study...
Hypothesis1: Right after an announcement (e.g. labour figures/CPI/...), vol. should increase
Hypothesis2: if implied vol. crosses its 20days ewma, you should hold a position for 5days (either short or long, depending on crossing direction)

What are your thoughts, opinions and recommendations about that???


Thank you for your ideas in advance
Dennis
More...

depend on the RISK capital in the account
 
When you use the term "volatility", are you referring to the option premium (implied volatility), or are you referring to movement of the underlying stock (realized volatility). Your initial post seems to refer to both of these, but they are different.

Also, have you clarified with your professor that your objective is to make profit (speculate), or to create an effective hedge for a portfolio (risk management). Big difference. Note that option strategies are much easier to formulate for hedging than speculation, so if you have any influence on what your professor expects, I recommend you define your objective as hedging. Better chance of a getting a good grade :D
 
you sell vol when it's high and hope it goes lower and that you are capable of managing the position.

when it's low, you buy it and hope it goes higher and that you can manage the position.

you don't need the vix to trade vol. all options have volatility, well, not the expired ones. it's about taking a position in the volatility and managing your position.

if you sell vol, can you manage your short gamma effectively? if you are long gamma, can you get enough movement to scalp your gamma? is the vol just on the high or low end of it's trading range or is it really bid for a reason? you need to have an idea what sort of movement is being priced into the underlying.
 
OP, all great advice from the other posters. here's my advice: tell your professor in front of the whole class: those that can't trade options vol, teach others how to trade options vol:cool: then come on here and provide a description of what happened next.
 
I would recommend the reading the book "The Volatility Edge in options Trading" by Jeff Augen. In it, he addresses the issues you have mentioned as well as a methodolgy for managing the data through the measurement of relative magnitude of price and volume as opposed to more "traditional" methodologies. His books are excellent and I have successfully applied many of his concepts to my fund's trading. And for the record, I am not Jeff Augen nor do I know the man.

Best of luck to you!
 
Interesting - I didn't read that book of his but I did get the one on day trading options and thought it (and moreoever his approach) was awful. I'm not being argumentative here, more curious that I may have overlooked some good content. Can you give an example of what you meant by "a methodolgy for managing the data through the measurement of relative magnitude of price and volume as opposed to more "traditional" methodologies"?

The daytrading options book was a couple of cherry picked examples that "prove" some theories he laid out, but there was no significant statistical evidence given that any of them are in fact even a slight edge. He also has a funny way of doing things...for example, if the expiration date is on friday he insists on modelling the option until saturday and moving IV gradually down to zero on friday. Who cares...the optionality is gone at 5:15pm on friday and synthetic vol/time is going to look the same whether t or IV go to zero...yet, he belabors this point as if it's novel and despite the fact that it's more onerous from a modelling standpoint. (he claims all the 'pros' do it that way - but I've never heard of a single person other than him who does it). So the only takeaway from the book for me was that he personally compiled a nice options database and can test ideas.

OP - You may also want to check out "Volatility Trading" by Euan Sinclair.



Quote from HFStartup:

I would recommend the reading the book "The Volatility Edge in options Trading" by Jeff Augen. In it, he addresses the issues you have mentioned as well as a methodolgy for managing the data through the measurement of relative magnitude of price and volume as opposed to more "traditional" methodologies. His books are excellent and I have successfully applied many of his concepts to my fund's trading. And for the record, I am not Jeff Augen nor do I know the man.

Best of luck to you!
More...
 
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