Why don't options get relatively cheaper as volatility increases?

[wxytrader]

Option pricing models such as Black-Scholes and binomial lattice do not factor in trend reversals (i.e., stock price reversing). There is no variable for drift.

They may not factor it in directly in the model, but it does emulate it via the drop in IV from otm to itm.

I am referring to options pricing factoring in the probability of a drop in IV after an expected move, which they do via the skew. For example the MARA 20 strike call is 1.06 (104.61%) and the atm strike is 2.07 (101.78%). Even though the atm is more expensive, it is less expensive relative to what you paid for the 20 strike.

 

[taowave]

Tsk Tsk,this is what happens when you don't manage risk..

With that said,do you want to sell cheap "wings" in Mara??

Get off Ralph Elliot Nelson's weiner and learn how to trade

A mind is a terrible thing to waste

 

[2rosy]

Depending how the question is interpreted, you can say they do

 

[poopy]

As Bollinger states times of high volatility is followed by times of low volatility. If this is true then the pricing model should factor this inevitable drop in volatility (price) during times of high volatility. The options can still increase in price, but should increase relatively less as volatility increases. On the flip side, options prices should increase relatively more in price as volatility drops.

The skew basically will have IV decrease as price goes from otm to itm...so options prices actually do get relatively cheaper as implied volatility drops off after the expected move is reached...so essentially as price goes up, volatility increases...but as price moves closer itm, volatility decreases so options get cheaper mimicking as if an expected drop of price is imminent. I see how it works now, and why there is a skew.

Please f-off with the Bollinger sht.

You cannot arb a vol-line. Fixed strike vol at 40 and what/where are you buying? You're suggesting shorting vol naked. The point is that it cannot be arbed. Structurally there is more juice in upside spreads (cs as revenue side) especially when vols and skews are high (typically one or the other), but you're not making anything from spreading a long (delta) OTM cs/ps RR.

Do it! Short VX futures on BB-signals.

edit: Short VX, short ES.




















yeah, I've gone soft.

 

[wxytrader]

I am referring to options pricing factoring in the probability of a drop in IV after an expected move, which they do via the skew. For example the MARA 20 strike call is 1.06 (104.61%) and the atm strike is 2.07 (101.78%). Even though the atm is more expensive, it is less expensive relative to what you paid for the 20 strike.

Please f-off with the Bollinger sht.

You cannot arb a vol-line. Fixed strike vol at 40 and what/where are you buying? You're suggesting shorting vol naked. The point is that it cannot be arbed. Structurally there is more juice in upside spreads (cs as revenue side) especially when vols and skews are high (typically one or the other), but you're not making anything from spreading a long OTM cs/ps RR.

Do it! Short VX futures on BB-signals.
yeah, I've gone soft.

All I'm saying is the skew makes an itm option cheaper relative to its price otm....which emulates an option becoming cheaper after an expected move...in other words trend reversal probability is factored into options prices indirectly. However, it does not account for the sudden IV crush that typically occurs at a trend reversal. This flaw imo in the pricing model is the only edge that exists in options trading. I believe your arb trading exploits this flaw but is limited by directional prowess...hmmm maybe your group could use some EW members or member to help out???

 

[poopy]

All I'm saying is the skew makes an itm option cheaper relative to its price otm....which emulates an option becoming cheaper after an expected move...in other words trend reversal probability is factored into options prices indirectly. However, it does not account for the sudden IV crush that typically occurs at a trend reversal. This flaw imo in the pricing model is the only edge that exists in options trading. I believe your arb trading exploits this flaw but is limited by directional prowess...hmmm maybe your group could use some EW members or member to help out???

You keep editing. I am done after this bc you're false.

No. An SPX ITM call shares a strike with a +skew OTM put therefore both are skewed. That parity thing. If the call is "cheap" (relative to same strike put) then you buy the call, short the put and short futures (reverse-conversion arb). IOW same-strike vols are =. You must get off on knowing absolutely nothing.

And WRT my motivation for anyone asking. I am not really answering wxyz but trying to help with basic stuff for others reading this later (god knows who that would be).

I am a better D1 trader than vol(trader). Don't go there.

 

[wxytrader]

You keep editing. I am done after this bc you're false.

No. An SPX ITM call shares a strike with a +skew OTM put therefore not are skewed. That parity thing. If the call is "cheap" (relative to same strike put) then you buy the call, short the put and short futures (reverse-conversion arb). IOW same-strike vols are =. You must get off on knowing absolutely nothing.

And WRT my motivation for anyone asking. I am not really answering wxyz but trying to help with basic stuff for others reading this later (god knows who that would be).

I'm not referring to indexes or to parity. These are all machinations based on a flawed premise. I am talking about options being most expensive when they should technically be least expensive based on the probability of a reversal/IV crush after an expected move.

If you are buying home insurance at the end of flood season, you would expect to pay less than in the middle of flood season.

Buying a call when IV is high, is like paying top premium for flood insurance right before a drought.

That parity thing. If the call is "cheap" (relative to same strike put) then you buy the call, short the put and short futures (reverse-conversion arb). IOW same-strike vols are =.

That sounds like a lot of work just to avoid being directionally biased.

 

[taowave]

God dam,WXY,you are good.This shit is so over the top I took you off Snooze..

What type of sticky skew guy are you? ( p.s.,you should know the difference..hint hint)

Why don't you load up on call spreads,collect the skew edge,delta hedge it or Prechter it and take out the vig??

Or stick to what you clearly don't know,trading direction..If you had any D1 ability,you wouldn't be selling cheap puts..

 

[wxytrader]

In other words, as a successful trading strategy why don't people short the VIX when it reaches 40, or 50, or 60, etc.? I'm sure many tried that in March of 2020 and got burned horribly, despite it eventually turned lower. It can continued to remain at that level of volatility or increase for an unpredictable amount of time. I'm quite sure you also suffer from backwardation as you are trying to nail that top, even if the volatility doesn't lower.

Also, if you nail the bottom in terms of a rally, which I believe happened in March of 2020, the VIX doesn't always decrease for some time. When it keeps going higher you get burned hard too, it's not a small loss. Just putting out risks, certainly nailing the top of volatility would be very profitable but a lot of risk. I'm sure people like poopy and other option traders know 50 better ways to do this then shorting VIX, but thought it was the easiest example to think of the risk/reward in doing it.

Who trades the vix? Why does options discussion always come down to the vix or indexes that move like mollasses? The only money to be made in options is high volatility stocks 0-5 dte. Any farther out and it's like watching an entire basketball game when you might as well just watch the last few minutes since that's when it's going to be decided.

 

[MrMuppet]

OP might be a monkey, but the question actually isn´t so bad when you relate it to skew.
When you buy a vega neutral 10delta butterfly (aka. you´re buying max volga) you will pay a lot of kurtosis (wings are expensive compared to ATM) as higher vol is anticipated and vice versa.

If you find a vega neutral 10d fly for tiny theta/gamma when IV and RV are rock bottom, you basically have a risk free trade