Volatility?

Nater

Nater

So, I've been paper trading Options for a little while now, and I've been able to determine the best time to buy a specific option, it's best length until expiration, and it's best strike price; but I can't seem to 'get' volatility. I mean, I understand what it measures and how it affects the price of the option, but I can't figure out when volatility is in my favor or not.

I use ISE's Quotes, Volatility, and Calculator tool, and it seems to give me all the information I need, but I just don't know how to use it properly.

I guess the problem is I don't know how to word this question well enough to find an answer for it. I just need one of you to point me in the general direction of where I should start when it comes to 'playing' volatility.

Or maybe I just have a misunderstanding of what volatility actually means and what I can derive from it. I mean, can you look at a volatility chart from a technical point of view like you would a stock price chart and see patterns and what have you? Or is it a little less useful than that.
 
Quote from Nater:

...I guess the problem is I don't know how to word this question well enough to find an answer for it. I just need one of you to point me in the general direction of where I should start when it comes to 'playing' volatility.

Or maybe I just have a misunderstanding of what volatility actually means and what I can derive from it. I mean, can you look at a volatility chart from a technical point of view like you would a stock price chart and see patterns and what have you? Or is it a little less useful than that.
More...
Discussing volatility is worthy of thousands of words of text. To be helpful to you, you'll have to tell us more about what you'd like to accomplish. Use specific examples.
 
Well, currently, on a virtual account, I am long an August 8.00 Put. I bought it 4 days ago, with the idea that BAC was going to go down. Today, the Put was up 25%. This is pretty good, but I didn't know how much more of a chance of it going up or done because of the velocity. I mean, I could have found the options vega, but I wouldn't know how likely and how fast the stocks implied volatility would increase or decrease, or if it would even change at all during the duration of the options life.

I know from looking that its implied volatility is at 44.51%. The options price (which at the time of the 25% increase was at 0.76) would decrease to something around 0.71 if its IV decreased to 40% within the day or it would increase to 0.82 if its IV increased to 50%. Now, this is a pretty big decrease or increase based on the IV rising or dropping a few percent, and it could prove to either make the option more profitable or possibly not profitable at all based on just how the volatility moves.

From this, I want to be able to find out which way the volatility is most likely to move. I know this is like asking how to know which direction a stock price is going to move, but at least with a stock's price chart I could use technical indicators to help me make a decision or use fundamental indicators to make a prediction. With implied volatility, I don't know what to look at to even have the smallest clue to as to which direction it's going to move. I also wouldn't even know how to find I bought it while its IV made the price expensive or cheap.
 
Think of volatility as the risk of selling something, the seller will want more premium for that extra risk. Some stocks are riskier than others to sell options on.

:)
 
I'll let the experts get into this, as I am NOT one of them.
I'll simply say when IV is high, it's a good time to sell puts, as you can either get a higher credit for them, or you can use that situation to select strikes even deep OTM for more safety... or both.
And when IV is low, it's a good time to buy puts for protection, as it doesn't cost as much.

There is a place to go where you can see what the stocks IV has been averaging over the past year or more, and thus compare it's current IV to it's historic past.
But you have to evaluate what was going on in the past, with it's high and/or low IV, in CONTEXT with what was going on in the market and that particular stock and/or sector back then as well.
Without that "context", it may or may not give you a balanced reflection of whether the current IV is high, low or normal for that stock.
Sorry but i don't recall the site, as i have not used it in a while.
Others will know it.
 
Quote from Nater:

So, I've been paper trading Options for a little while now, and I've been able to determine the best time to buy a specific option, it's best length until expiration, and it's best strike price; but I can't seem to 'get' volatility. I mean, I understand what it measures and how it affects the price of the option, but I can't figure out when volatility is in my favor or not.

I use ISE's Quotes, Volatility, and Calculator tool, and it seems to give me all the information I need, but I just don't know how to use it properly.

I guess the problem is I don't know how to word this question well enough to find an answer for it. I just need one of you to point me in the general direction of where I should start when it comes to 'playing' volatility.

Or maybe I just have a misunderstanding of what volatility actually means and what I can derive from it. I mean, can you look at a volatility chart from a technical point of view like you would a stock price chart and see patterns and what have you? Or is it a little less useful than that.
More...

If volatility is declining you want to be a seller and if it is rising you want to be a buyer. Provided all of the other assumptions line up in the trade you want to take. A lot of people just look at a static volatility number and think it is high or low and trade off of that. As you will learn, volatility can go a lot higher or lower which means your trade is in trouble. Depending on the strategy you should track the implied volatility at the money and then consider tracking volatility on the out of the money options. A steep skew can help you in some trades hurt you in others.
 
<<< If volatility is declining you want to be a seller and if it is rising you want to be a buyer. Provided all of the other assumptions line up in the trade you want to take. >>>

Unfortunately, you will only know in "hindsite", if the IV trend that was rising or declining at the time you initiated a trade, will continue after you initiate the trade.
And will that same trend continue for a day, 3 days, a week, a month???
Some traders can predict such future trends reasonably well.
I can't.
 
Quote from Put_Master:

<<< If volatility is declining you want to be a seller and if it is rising you want to be a buyer. Provided all of the other assumptions line up in the trade you want to take. >>>

Unfortunately, you will only know in "hindsite", if the IV trend that was rising or declining at the time you initiated a trade, will continue after you initiate the trade.
And will that same trend continue for a day, 3 days, a week, a month???
Some traders can predict such future trends reasonably well.
I can't.
More...

Outside of events that influence a sudden change in IV I find that trading around volatility assumptions are a lot easier than price direction. However, in the end like every other strategy you are still making assumptions and trading based off of that.
 
Quote from Dolemite:

Outside of events that influence a sudden change in IV I find that trading around volatility assumptions are a lot easier than price direction. However, in the end like every other strategy you are still making assumptions and trading based off of that.
More...

I would agree.
However, one of the nice things about option trading is that we don't have to trade based on "price direction".
Instead, we can invest based on rather wide "trading ranges",.... singular and/or multi directional, with built in safety cushions.
I would think most find it easier, to trade "cushioned price support and/or resistant" levels" vs "price direction".
Thus I'm not sure the proper question is which is easier...."price direction or volatility".
The question should be, which is easier to trade.... cushioned trading ranges or volatility?
We each have our own preferences.
 
It really comes down to which strategies you use and your risk tolerance. Predicting where vol is going is impossible for me but when RVX hit 30 this month I wasn't buying calenders but I was selling verticals like a madman. Nothing is linear in options so think of volatility as synthetic time. As it passes Theta and Vol eventually come out and that's where you make your money. BUT the closer you get to expiration Gamma can rip your face off and make you wish you'd never heard the word option before. Paper trading to me is worthless so my advice would be to take a strategy that you're studying and trade 1 contract in an ETF like SPY or the Diamonds to get a feel for how the spread react's to Delta and volatility changes. Always remember a 5 standard deviation move isn't common but they do happen so define your risk before entry and stay SMALL.
 
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