What is IV?

Look at Market Chameleon Charts..

You are looking at skew in a very low vol environment.Its different in a high vol environment.

I'll try and find the paper I have on Skew and post it






morganpbrown said:
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.

View attachment 268127

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.
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Basically, the bigger the move the market expects in one day the higher the IV. (This is just a lazy explanation.)

GME SPRT ATER BBIG some past examples.
 
GotherL said:
Basically, the bigger the move the market expects in one day the higher the IV. (This is just a lazy explanation.)
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The "lazy explanation" can be incredibly profound. And much more effective to understanding and implementation.

Trading (and implied IV) is like love and relationships...the more you try to analyze it, and break it down to each molecule, the more the concept seems to disintegrate.
 
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taowave said:
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
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That's easy to answer.
For directional trading you want to use the option that provides the highest possible gamma per unit of theta. IV is negligible in very short term options, they are gamma plays for the most part.

As short term options IV is heavily skewed, you will find that these options are almost always the ATMs.
 
morganpbrown said:
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.

View attachment 268127

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.
More...
As IV is mean reverting you will find that during periods of low realized volatility, short term IV trades below long term IV and vice versa.

It's quite intuitive when you think about it. Volatility is calculated as an average of daily returns. When you take a rolling 10 day average, there will be 10 day periods where nothing happens so volatility is very low. During periods of high realized vol, the 10 day average only consists of large average returns which makes the average spike up.

There are more high and low daily returns in a 180 day average which smoothes out the result. So the 180 day vol doesn't move as much as the 10 day vol
 
MrMuppet said:
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
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MrMuppet said:
That's easy to answer.
For directional trading you want to use the option that provides the highest possible gamma per unit of theta. IV is negligible in very short term options, they are gamma plays for the most part.

As short term options IV is heavily skewed, you will find that these options are almost always the ATMs.
More...

That is fascinating and appears to be the missing link for day trades. Thank you for taking the time to write all this up.
 
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