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What is IV?
- Thread starter morganpbrown
- Start date
exactly right. In order to make an estimation on price, you need to compare the option IV either to realized vol, to another option strike or time to expiration. A price is always relative
Thank you for this insight. For day to day trading, should this be automated, or just check for deviation with some mental math looking up and down the chain or term structure?
For daytrading you want to prefer very short term options such as 2day options or weeklies.
Short term IV moves a lot but the options don't have a lot of vega.
If you want to trade moves in the underlying, you want the most gamma you can get and these are in short term options.
You should have an eye on IV though. If you trade stuff like GME where short term vol was around 170 and you trade options on the backside of the move when IV deflates, you will be in pain nevertheless.
But IMO options not further out than one week are your best bet when you close positions at the end of the day
I knew I could count on you
So given the choice,if bid offer spread was minimal,woukd you
Daytrade a 1 Delta option,.75,.5 or .25,which single option would you trade???
And if I said you can trade more than 1 option with X dollars to risk,would you trade
1 Delta 1 option
2 Delta .5 options
4 Delta .25 options
Or would you not look at Delta and simply look at equal dollars and load up,maybe with a stop,maybe not
So given the choice,if bid offer spread was minimal,woukd you
Daytrade a 1 Delta option,.75,.5 or .25,which single option would you trade???
And if I said you can trade more than 1 option with X dollars to risk,would you trade
1 Delta 1 option
2 Delta .5 options
4 Delta .25 options
Or would you not look at Delta and simply look at equal dollars and load up,maybe with a stop,maybe not
OK, so dumb question number 10 or so. I went to barchart.com (they seem to have good, dynamically updated options chains) and looked at Sept 24 (10 DTE), Oct 15 (27 DTE), and Nov 19 (63 DTE) calls on SPY.
I plot IV versus DTE and there's a clear increasing IV with DTE. There's also a clear increase in IV with delta.
Is this IV structure really the doing of the buy/sell action of mainly a bunch of retail one-lot traders? Or do the market makers impose the general structure a priori, then perturb it as market forces warrant?
I guess it doesn't matter - the IV structure is what it is. The fact that there is structure at all seems to open a multitude of corners in which to play.
I plot IV versus DTE and there's a clear increasing IV with DTE. There's also a clear increase in IV with delta.
Is this IV structure really the doing of the buy/sell action of mainly a bunch of retail one-lot traders? Or do the market makers impose the general structure a priori, then perturb it as market forces warrant?
I guess it doesn't matter - the IV structure is what it is. The fact that there is structure at all seems to open a multitude of corners in which to play.
Indeed it does, and even guys with Nobel Prizes in Economics can't seem to get it right. Looking at you LTCM.
In my limited knowledge what I understand is this, the higher the DTE, higher is the chance of underlying moving. Hence, MMs pricing in higher IV in longer DTE options. As for delta, ATM options has highest intrinsic value. But question is, is your plot for call or put? If it is for call, your plot is correct, because OTM with less delta will have lower IV than ATM with delta 0.5. But for puts, because of skew, you may see lower delta OTM puts having higher IV than ATM.
Thank you. Makes a lot of sense.
This plot was for calls