In the idiosyncratic world (e.g. single stocks), the above almost always true. In the beta world (e.g. index or bond futures), realized vol is a good predictor of future realized vol. Also, in cases of extreme macro events like 2008 and 2011, even after the move, a lot was hinging on the upcoming policymaker decisions, which calls for a long gamma position.
What does Karen the Supertrader and her results say about volatility? Oversold?
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In the idiosyncratic world (e.g. single stocks), the above almost always true. In the beta world (e.g. index or bond futures), realized vol is a good predictor of future realized vol. Also, in cases of extreme macro events like 2008 and 2011, even after the move, a lot was hinging on the upcoming policymaker decisions, which calls for a long gamma position.
FWIW an old rule of thumb I was taught in equities -
a sudden large move in the market is more likely to be followed by further large moves in individual stocks.
whereas - a sudden large move in an individual stock usually requires some consolidation.
Hence there are often times buying expensive short term gamma is still worth it and a lot maybe determined by if its a single element/item moving or a market shift. A lot also depends on where you are relative to expiry, and expected moves based on where to buy/sell gamma.
a sudden large move in the market is more likely to be followed by further large moves in individual stocks.
whereas - a sudden large move in an individual stock usually requires some consolidation.
Hence there are often times buying expensive short term gamma is still worth it and a lot maybe determined by if its a single element/item moving or a market shift. A lot also depends on where you are relative to expiry, and expected moves based on where to buy/sell gamma.
Are you implying that after large moves in index (market), you would want to be long dispersion? That is, you would be better off owning single stock gamma and selling index gamma against it?
what would the purpose or advantage be to your trading?
I think you know the answer ;-)
sle - sorry for the late reply - missed this.
A: not necessarily.
I was more referring to individual stocks as opposed to introducing the index.
Hence, if you are trading a stock that moves suddenly with a major shift in the market, then the rule of thumb was to buy rather than sell for that individual stock. If you are trading gamma. (This was also way before computers and any real data analysis)
Different ballgame, if looking at a wide basket of stocks v index.
The thinking was that there are more forces at play on a individual stock now, hence possibly more volatility short term in the individual, whereas if it was simply a profit warning or such then the stock usually settled down quickly but just at new levels.
Remember every option position can be replicated by being/long short delta-adjusted quantities of the underlying.
Whoever bought the puts from the seller (the other side of the trade) can hedge themselves by being long the underlying. Depending on the exact path of movement of the underlying to expiration both the seller and (delta-hedged) buyer of the option contract can have a positive return on their trade.