Who is really making a living trading options??

[StarDust9182]

"Is there a back-peddle emoticon? just kidding."

I take it you are back peddling then? I accept your apology - just kidding.

Disciple is not a term of endearment. Generally masters don't think much of hangers on. Sad is that person who needs to shine like the moon by finding a sun to attach to and amen that sun everywhere. It's embarrassing to say the least and thinking for yourself is so hard.

Grow a pair. Take a side. Add to the debate non-emotionally if possible and be willing to be wrong sometimes. You will learn much more this way and become a better person for it in my view. You will also earn more respect than playing "let's him and you fight" all the time.

 

[sle]

Quote from StarDust9182:

Grow a pair. Take a side. Add to the debate non-emotionally if possible and be willing to be wrong sometimes. You will learn much more this way and become a better person for it in my view. You will also earn more respect than playing "let's him and you fight" all the time.

I'd say that if someone on this board should not be accused of "not owning a pair" its atticus - check out the thread about selling index strangles (whatever the name of it was) a little while ago.

 

[opt789]

Quote from sle:

I'd say that if someone on this board should not be accused of "not owning a pair" its atticus - check out the thread about selling index strangles (whatever the name of it was) a little while ago.

He is losing his touch in this thread. Not one insistence that someone should commit suicide for the benefit of the community, no reference to a poster being on some esoteric drug, no bitingly humorous jabs about how someone is to moronic to even function. Must be in an unusually good mood.

 

[Martinghoul]

Quote from StarDust9182:
For most people reading the above comment, my concern is that if you try to pick options using implied volatility graphs, then in my view you are doomed to failure since implied volatility is price. Implied means derived and derived is from the particular price model you use of option reality.

The problem is similar to using indicators to try and forecast future price when the indicators are derived from price ultimately.

Semantically, when two words refer to the same concept then in my view, it is impossible for one to come before the other.

Wikipedia has a link on implied volatility. Hopefully the first sentences explain better what I am saying.

1) Implied volatility isn't quite the same thing as price.
2) What else can your rich/cheap indicators be based on, if it's not price?
3) I think you misunderstood the point of using implied vol.

 

[rew]

Quote from sle:

Right, so you agree that volatility comes first? Further, it's pretty easy to prove to yourself that implied volatility is nothing more then markets guess of the future realized vol.

The fact that this volatility "estimate" comes from a price of an option or is quoted to you directly (as in case of variance swaps) or estimated by taking volatility of a related instrument is not important. What is important is that option is priced in a risk-neutral setting (yes, it is true) and it's price depends on the expectation of volatility rather then expected returns of the underlying or any other sort of woodoo.

I note that different strikes for the same month and underlying have different implied volatilities. Given that future volatility has nothing to do with the strike price, and given that there can only be one "expected future volatility", it is not coherent to say that each of these implied volatilities is the market's guess of the future volatility. Of course the reason the different strikes have different IVs is because everybody knows that real price charts have bigger swings than you get with the simple constant volatility Wiener process assumed by BS. In other words, market makers are explicitly or implicitly taking parameters other than volatility into account, such as kurtosis.

I will grant that of the parameters that have to be estimated, the future volatility is the most important. But unless you live in a world where BS works exactly the expected future volatility and the implied volatility are not the same thing.

 

[Martinghoul]

Quote from rew:
I note that different strikes for the same month and underlying have different implied volatilities. Given that future volatility has nothing to do with the strike price, and given that there can only be one "expected future volatility", it is not coherent to say that each of these implied volatilities is the market's guess of the future volatility.

Surely that's not right... In a world where volatility is in itself a stochastic process, why can't there simultaneously exist a whole multitude of "expected future volatilities"?

 

[rew]

Quote from Martinghoul:

Surely that's not right... In a world where volatility is in itself a stochastic process, why can't there simultaneously exist a whole multitude of "expected future volatilities"?

Why should the future volatility depend on the strike price? That makes no sense. And if our flustered market maker has in mind a "multitude of expected future volatiilites", how does he decide how to price even a single option? Does he give it a multitude of prices?

 

[newwurldmn]

Quote from rew:

I note that different strikes for the same month and underlying have different implied volatilities. Given that future volatility has nothing to do with the strike price, and given that there can only be one "expected future volatility", it is not coherent to say that each of these implied volatilities is the market's guess of the future volatility. Of course the reason the different strikes have different IVs is because everybody knows that real price charts have bigger swings than you get with the simple constant volatility Wiener process assumed by BS. In other words, market makers are explicitly or implicitly taking parameters other than volatility into account, such as kurtosis.

I will grant that of the parameters that have to be estimated, the future volatility is the most important. But unless you live in a world where BS works exactly the expected future volatility and the implied volatility are not the same thing.

There is a path dependency to options and the skew helps price that in. That is that you are likely to realize more volatility on the downside where the lower strikes will have more gamma and make more money than on the upside.

 

[StarDust9182]

"1) Implied volatility isn't quite the same thing as price.
2) What else can your rich/cheap indicators be based on, if it's not price?
3) I think you misunderstood the point of using implied vol."

1) OK, please help with with the difference. (Let's try and discuss it as equals.)

2) There are indicators based on volume, price, time, range, star positions, and probably phases of the moon. Aren't there?

I have no doubt there are many selling secret indicator formulas on this very board!

3) Fair enough, so how does one use implied volatility to make money?

 

[StarDust9182]

"I'd say that if someone on this board should not be accused of "not owning a pair" its atticus - check out the thread about selling index strangles (whatever the name of it was) a little while ago."

Amen to that!