What is IV?

[MrMuppet]

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.

Make sure you understand that volatility is mean reverting, which means it does not trend. The good thing about that is the fact that there are certain boundaries to it which you can use to gauge where current volatility is trading at.

If you see the 30 day IV of the S&P trading at 80 vols, you kinda know that it would be silly to buy 30 options, since 80 is about close to the maximum reading for the S&P.
Vice versa, I would not be selling 30day vols at a VIX reading of 12 without downside protection.

Use that knowledge at your own discretion. Betting on vol alone is really hard since there are a ton of other factors to consider such as skew, kurtosis and the fact that your P/L is path dependend.
But if you use options to speculate on the stock, knowing about IV gives you a major advantage over people like @SPX Options Trader because you can establish a position that has a better risk/reward than trading the underlying itself or just punting outright calls and puts

 

[ondafringe]

Make sure you understand that volatility is mean reverting, which means it does not trend. The good thing about that is the fact that there are certain boundaries to it which you can use to gauge where current volatility is trading at.

If you see the 30 day IV of the S&P trading at 80 vols, you kinda know that it would be silly to buy 30 options, since 80 is about close to the maximum reading for the S&P.
Vice versa, I would not be selling 30day vols at a VIX reading of 12 without downside protection.

Use that knowledge at your own discretion. Betting on vol alone is really hard since there are a ton of other factors to consider such as skew, kurtosis and the fact that your P/L is path dependend.
But if you use options to speculate on the stock, knowing about IV gives you a major advantage over people like @SPX Options Trader because you can establish a position that has a better risk/reward than trading the underlying itself or just punting outright calls and puts

Okay, more insights. I'll take the things you've pointed out in this thread, along with those from others, and spend some time over on Market Chameleon to see if I can get some perspective.

Thanks, again, for your time.

 

[MrMuppet]

Okay, more insights. I'll take the things you've pointed out in this thread, along with those from others, and spend some time over on Market Chameleon to see if I can get some perspective.

Thanks, again, for your time.

no worries, mate

 

[ITM_Latino]

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.

 

[ITM_Latino]

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.

nvmd, you already knew Market Chameleon.

 

[ondafringe]

nvmd, you already knew Market Chameleon.

That's okay. I'm watching it now. Thanks!

Definitely informative. Gonna grab a bite to eat, then watch it again.

 

[Matt_ORATS]

I'll talk about skew and IV a way to tell they are over or undervalued.

The best way I have found to represent skew is by the slope of the IV line at the 50 delta adjusted for derivative or kurtosis, or the smile. The problem with using the 25 delta call/put is that it does not account for curvature.

ORATS communicates skew by our Slope measure. We present it by each month and as constant maturities of 30 days and 2 years. We communicate Slope for example today is 9.2% and represents the rate of change in IV every 10 call deltas higher. So a 100% IV ATM would have a 60 delta call at 109.2% IV. But there is also Derivative, the amount the Slope changes every 10 deltas.

This results is a normalized Slope that can be observed over time. In the graph below the three lower graphs are IV 20.6%, Slope 9.2% and Derivative 0.10%. Slope is still very high on the graph. Usually, when the market is down slope tends to fall. This did not happen today, it rose from Friday. I take this as the market not thinking the fall in the market is over and continuing to bid up the small puts vs the calls. At market bottoms it is not uncommon for the slope to get down to 5% as the calls get bid up relative to the puts as the entire skew flattens as the IV rises. To me, skew looks expensive but is probably that way for a reason.

For assessing the level of IV, this is a tougher prediction. ORATS makes a forecast based on historical volatility (Parkinson) mostly and a few other factors. Below the bottom three graphs are Forecast/IV, HV/IV and IV 30 day. Notice have the forecast just peaked up to a buy (Forecast/IV>1) on Thursday.

 

[ondafringe]

I'll talk about skew and IV a way to tell they are over or undervalued.

The best way I have found to represent skew is by the slope of the IV line at the 50 delta adjusted for derivative or kurtosis, or the smile. The problem with using the 25 delta call/put is that it does not account for curvature.

ORATS communicates skew by our Slope measure. We present it by each month and as constant maturities of 30 days and 2 years. We communicate Slope for example today is 9.2% and represents the rate of change in IV every 10 call deltas higher. So a 100% IV ATM would have a 60 delta call at 109.2% IV. But there is also Derivative, the amount the Slope changes every 10 deltas.

This results is a normalized Slope that can be observed over time. In the graph below the three lower graphs are IV 20.6%, Slope 9.2% and Derivative 0.10%. Slope is still very high on the graph. Usually, when the market is down slope tends to fall. This did not happen today, it rose from Friday. I take this as the market not thinking the fall in the market is over and continuing to bid up the small puts vs the calls. At market bottoms it is not uncommon for the slope to get down to 5% as the calls get bid up relative to the puts as the entire skew flattens as the IV rises. To me, skew looks expensive but is probably that way for a reason.

For assessing the level of IV, this is a tougher prediction. ORATS makes a forecast based on historical volatility (Parkinson) mostly and a few other factors. Below the bottom three graphs are Forecast/IV, HV/IV and IV 30 day. Notice have the forecast just peaked up to a buy (Forecast/IV>1) on Thursday.

Thanks for the overview. Appreciate it.

 

[taowave]

If I am reading you correctly your Slope measure offers more information than the widely used 25 D put- 25 D call due to the "curvature" (gamma) at different percent of spot..
When I chart Skew in Orats,I typically look at the 25 D ratio of 75D/25D as well as 90D/10D
The difference between those ratios is due to curvature,which it appears your slope measure captures..Interesting
I personally like to chart the skew ratios for different deltas as it gives me a more intuitive feel...

Any thoughts on (25D put IV vs 25d call IV)/ATM vol..
I run those in Orats as well,but havent really formulated a strong opinion one way or the other.It appears that the ATM vol really drives the ratio..

I'll talk about skew and IV a way to tell they are over or undervalued.

The best way I have found to represent skew is by the slope of the IV line at the 50 delta adjusted for derivative or kurtosis, or the smile. The problem with using the 25 delta call/put is that it does not account for curvature.

ORATS communicates skew by our Slope measure. We present it by each month and as constant maturities of 30 days and 2 years. We communicate Slope for example today is 9.2% and represents the rate of change in IV every 10 call deltas higher. So a 100% IV ATM would have a 60 delta call at 109.2% IV. But there is also Derivative, the amount the Slope changes every 10 deltas.

This results is a normalized Slope that can be observed over time. In the graph below the three lower graphs are IV 20.6%, Slope 9.2% and Derivative 0.10%. Slope is still very high on the graph. Usually, when the market is down slope tends to fall. This did not happen today, it rose from Friday. I take this as the market not thinking the fall in the market is over and continuing to bid up the small puts vs the calls. At market bottoms it is not uncommon for the slope to get down to 5% as the calls get bid up relative to the puts as the entire skew flattens as the IV rises. To me, skew looks expensive but is probably that way for a reason.

For assessing the level of IV, this is a tougher prediction. ORATS makes a forecast based on historical volatility (Parkinson) mostly and a few other factors. Below the bottom three graphs are Forecast/IV, HV/IV and IV 30 day. Notice have the forecast just peaked up to a buy (Forecast/IV>1) on Thursday.

 

[morganpbrown]

If I am reading you correctly your Slope measure offers more information than the widely used 25 D put- 25 D call due to the "curvature" (gamma) at different percent of spot..
When I chart Skew in Orats,I typically look at the 25 D ratio of 75D/25D as well as 90D/10D
The difference between those ratios is due to curvature,which it appears your slope measure captures..Interesting
I personally like to chart the skew ratios for different deltas as it gives me a more intuitive feel...

Any thoughts on (25D put IV vs 25d call IV)/ATM vol..
I run those in Orats as well,but havent really formulated a strong opinion one way or the other.It appears that the ATM vol really drives the ratio..

This ORATS looks like the way to go for data and analysis. Too involved for someone trying to get their feet under them? I'm desperate to visualize how the greeks interact for various spreads. I can model the options but the lack of an API to real time data is frustrating