When an asset moves higher is it excess demand or over supply? The reason why I am asking is, I want to know whose lunch I am eating. Let's look at an example to give context to my question. NVDA is trading at all time low implied vol for all expiaries in the first year. I want to increase my position in a long straddle however if I could describe a qualitative reason for taking a position I would be that much more confident. I first want to state that NDX and SPX are not trading at all time lows (IV wise). So are there lack of buyers of vol? Over supply of sellers? And which ever is the case, why is it? To much call overwriting? PM's see no reason to hedge their long/short stock? Then dig deeper and say well why is there so much call over writing etc... knowing this will make me and other on this forum that much better. Thanks.
The question should be is the current IVOL higher or lower than the expected uncertainty or even the recent past? Looks like for now, IVOL is higher than nearterm movement but lower than the past.
@Robert Morse Hey Rob, so as you have pointed out the 30 day HVOL is 29% vs the 25% Implied vol. If you go the the 6 month it gets even worse. With IV ~= 32% (with 2 earnings in there). Implied vol should trade at a premium to historic and so if the IV is 25% for the next 30 days we "should" see sub 25% realized vol over the next 30 days. Which has NEVER happened over the past 2 years . So there is obviously some imbalance between supply and demand
NVDA earning were May 9th. It is not uncommon for demand to decline without any events pending. Not to say that is right or wrong, just common.
So quantitatively we can say buying NVDA vol here offers a good r/r. But what about qualitatively? NVDA had earnings a month ago so demand for vol has dropped to its all time low because no up coming events? I think there is more to this. Maybe the "sell vol in summer" effect? Over supply of vol sellers seems more likely. What other reasons may cause an imbalance between the supply and demand?
You're confusing apples and orange-colored bricks. Nothing remotely similar between supply/demand imbalances (that drive bidding changes in market price) and differences between HV and IV (which carry NO necessary link between the two of them). I am *hoping* you meant to say, "...or under supply". And the answer is, "Don't know! you can look at prior [candles'] volume for a clue, but whether it was an increase in Qdemand or a decrease in Qsupply that produces a climbing price, the price will rise just the same. What if the Qd↑ exactly when Qs↓?? These things would be good to know if you're looking for trend-ending signals, but otherwise...... "Whut?!?" Whatever you think "volatility" is, stop now: you're wrong. Historic vol is only from recorded prices; implied vol is derived from option prices which themselves are priced according to market expectations of future prices of (some) underlying. That's it. End of mystery. NO buyers of vol pushing or pulling or mashing or tricking anybody. Options are insurance. If an insurance company prices their policy according to market pressures rather than event-risk, they will go out of business. DO YOU WANT TO GO OUT OF BUSINESS?
supply and demand for options move vol. So if there is a lot of demand for options vol will increase. Im stating WHY would there be so little demand/ so much supply that the IV would be driven to all time lows even lower than any NVDA historical vol point. The market is smart is it not? That would be like the SPX vol going to 3%. (Everyone would buy and the vol would get driven back up to a reasonable level). Tom I have a good grasp on what hvol/ivol is. Options are not only insurance, they are ways to speculate on the volatility of the underlying, whether that be hvol/ivol/forwardvol/eventvol etc.. If I want to BUY vol I can buy a straddle and delta hedge for example. Many more ways to do it. I don't understand why you think my statement is false. The market prices vol wrong all the time. IF it didn't there would be no reason to trade. So I ask again. What are some reasons why there would be so much supply/ so little demand for OPTIONS (there. happy? ) that would push the OPTIONS price to trade lower than there previous all time low? I am talking about structural/seasonality etc..
No, they are simultaneously determined -- the {implied} volatility to which you are referring is derived from the option prices -- it is a side calculation -- a happenstance. If you look up ANY definition of implied volatility, you will see distance_from_the_market, you will see time_til_expiration, and if it's really complete, you might even see a reference to interest rates. One thing you WILL NOT SEE, is any reference to the supply or demand for options [at any strike]. What are options? "Options are insurance." Insurance against what? Price movement. But if we substitute 'property insurance' for 'options' and 'violent weather' for 'vol' in your statement above, it would read, "So if there is a lot of demand for property insurance[,] violent weather will increase." Yeah, see? Yeah. Not so much goodness in that sentence. Nah.
Supply & Demand has very little impact on the option price. And with IV, it's not just the differential between IV and historical volatility; it's the differential if any between the IV and its EXPECTED price movement of the underlying. With the example of NVDA, even if the current IV is higher than historical volatility but if the IV perfectly matches what everybody EXPECTS what the price movement would be for the underlying, then you are not going to see the option price being higher than what it is now. This is why option investing is so hard, you are only going to profit if the option price under/over compensates the EXPECTED IV, i.e. everybody else thinks the IV should be 0.1 and you think it should be 0.2 and you ended up being correct then that's when you get the windfall otherwise if everybody else thinks the IV should be 0.1 and it turns out it's really 0.1 then you are screwed. And you are not going to know until after the fact cuz nobody knows how the stock moves or by how much beforehand by the time when everything is known there is no value.