What is IV?

newwurldmn said:
Too much work.
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tbh my real edge to date is picking direction. But probably more luck (market trend) than anything :D
There's a MA in weekly time frame that works wonders in equities (backtested plenty, forward tested plenty too $$).

Some time ago some member told someone (can't remember who were) something along the lines of 'you are a chart reader that trades options', and while still learning this craft that's exactly what I am (and I am aware this is not the way to trade options, but I couldn't let this market opportunity pass by while still learning).
 
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newwurldmn said:
he should write a differential eq to model the gradient change of gamma to theta as strikes change and then seek to to find the local maxima. :)
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Currently more focused on the effect of proxima in the skewness of the vol surface. :D
 
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Since this thread is not dead... yet... and if anyone left is in a teaching mood...

Mr. M indicated that you have to compare IV to RV/HV or to another strike to determine whether IV is high. But how high is too high?

If you look at SPY options at the close Friday, all the puts have higher IV than the calls, and higher than HV. But how do you know if the premium is too high to buy? Is it based on so many points higher, or what?

If no one is in a teaching mood, feel free to treat me like a potted plant. :)
 
zghorner said:
Just to reiterate (i know i am not on your level but it helps me learn to engage in conversation)...

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Heheh I went on amazon to buy Cottle’s book, and this one was recommended

https://www.amazon.com/dp/B08BNGKKM5
 
ondafringe said:
Since this thread is not dead... yet... and if anyone left is in a teaching mood...

Mr. M indicated that you have to compare IV to RV/HV or to another strike to determine whether IV is high. But how high is too high?

If you look at SPY options at the close Friday, all the puts have higher IV than the calls, and higher than HV. But how do you know if the premium is too high to buy? Is it based on so many points higher, or what?

If no one is in a teaching mood, feel free to treat me like a potted plant. :)
More...

that’s the hard part. All the talk about what IV is, etc is just text book knowledge. Determining what is rich and cheap is the application of that knowledge and there isn’t a clear objective answer.
 
The comparing of IV vs Hv is simple.The comparing of skew is simple. Making money is the tough part.Like direction,calling bottoms or tops is no easy task..

What you will need is a decent program that has historical data on IV and HV. Typically it's broken down to various time frames such as 20 day,30 day,60,90,1 year etc..

There are metrics such as,IV rank and percentile which shows what percentile IV is trading in over the last year. You can look at IV - HV and see the rank as well..

As for "puts vs calls " (percent of spot),with the right program,it should be easy to measure skew.
You can look at the difference between 90 percent spot IV vs 110
Some like to look at the difference in IV of different deltas,like the 20 Delta call vs delta put..you can normalize it by dividing
by ATM vol.

I use Orats to chart all of the above..

So you see,it's pretty easy as lobg as you have access to the data.

As NWD pointed out,once you have all those pretty charts,can you use them to make some money???

No different than any other chart.







ondafringe said:
Since this thread is not dead... yet... and if anyone left is in a teaching mood...

Mr. M indicated that you have to compare IV to RV/HV or to another strike to determine whether IV is high. But how high is too high?

If you look at SPY options at the close Friday, all the puts have higher IV than the calls, and higher than HV. But how do you know if the premium is too high to buy? Is it based on so many points higher, or what?

If no one is in a teaching mood, feel free to treat me like a potted plant. :)
More...
 
taowave said:
The comparing of IV vs Hv is simple.The comparing of skew is simple. Making money is the tough part.Like direction,calling bottoms or tops is no easy task..

What you will need is a decent program that has historical data on IV and HV. Typically it's broken down to various time frames such as 20 day,30 day,60,90,1 year etc..

There are metrics such as,IV rank and percentile which shows what percentile IV is trading in over the last year. You can look at IV - HV and see the rank as well..

As for "puts vs calls " (percent of spot),with the right program,it should be easy to measure skew.
You can look at the difference between 90 percent spot IV vs 110
Some like to look at the difference in IV of different deltas,like the 20 Delta call vs delta put..you can normalize it by dividing
by ATM vol.

I use Orats to chart all of the above..

So you see,it's pretty easy as lobg as you have access to the data.

As NWD pointed out,once you have all those pretty charts,can you use them to make some money???

No different than any other chart.
More...

Thanks for the explanation. I had a feeling it wasn't going to be straightforward! lol

I've been using the free part of Market Chameleon. Maybe I can use your explanation to better understand what I'm seeing at that site.

Thanks, again.
 
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