zOptions Premium???

[spinn]

in my uneducated experience, it seems as if options have the most premium at the time you would least want to sell them.

What i mean is....when a call option on the SPY has $2 or $3 of premium, the SPY is very likely to continue to go up, no matter what the charts tell me. When the premium drifts down towards or very close to $0 the market is often ready turn back down.

It seems to me this is why most premium sellers eventually blow up. Is there anyone or method that tracks premium as a sort of contrarian indicator?

 

[spindr0]

The relative amount of time premium is a reflection of implied volatility. Implied volatility is a reflection of an expectation of a move but it is not a predictor of direction.

 

[dmo]

Quote from spindr0:

Implied volatility is a reflection of an expectation of a move but it is not a predictor of direction.

That's the theory. But in reality, implied volatility is more reactive in nature than it is predictive.

It's just like hurricane insurance in New Orleans. It didn't go up before Katrina, it went up after Katrina because Katrina cost insurers a lot of money and made them realize how catastrophic a big hurricane could be.

If you look at implied volatility last year, it didn't go up prior to the crash, it went up as a reaction to the crash, as premium sellers covered and panicky investors bought protection.

The markets are nothing if not paradoxical and, paradoxically, it's extremely LOW implied volatility that is predictive of a big move. Low implied volatility means high complacency, and panic follows complacency like night follows day.

 

[spindr0]

Quote from dmo:

If you look at implied volatility last year, it didn't go up prior to the crash, it went up as a reaction to the crash, as premium sellers covered and panicky investors bought protection.

The markets are nothing if not paradoxical and, paradoxically, it's extremely LOW implied volatility that is predictive of a big move. Low implied volatility means high complacency, and panic follows complacency like night follows day.

I agree that high IV is a reaction to the event. I was thinking in terms of pending news. So perhaps a better answer on my part would have been that IV is both and is really a function of demand. If no one is buying and selling, it drops.

I do not agree that "extremely LOW implied volatility that is predictive of a big move." It stays that way until some event changes it. It doesn't predict it. It precedes it.

 

[dmo]

Quote from spindr0:


I do not agree that "extremely LOW implied volatility that is predictive of a big move." It stays that way until some event changes it. It doesn't predict it. It precedes it.

Predicts it, precedes it - either choice of words is fine with me.

Most accurately, low implied volatility - which equals high complacency and low worry - lays the groundwork for high volatility. When as you say "some event changes it" - as it inevitably will - the lower the implied volatility the more people are caught by surprise and the more people are caught rushing for the exits at the same time.

 

[love2puck14]

Quote from dmo:

Predicts it, precedes it - either choice of words is fine with me.

Most accurately, low implied volatility - which equals high complacency and low worry - lays the groundwork for high volatility. When as you say "some event changes it" - as it inevitably will - the lower the implied volatility the more people are caught by surprise and the more people are caught rushing for the exits at the same time.

VIX is the obvious example... Low vix IE single digit indicates toppy-ness and the panic spikes were the bottoms. Just a function of the massive put premiums people are eating to protect. Obv. A great indicator. (The best ive found for general market direction)