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Discussion in 'Options' started by turkeyneck, Nov 6, 2012.

1. ### turkeyneck

Is it a good predictor of the expected range a stock will trade before expiration?

2. ### cdcaveman

that goes into the theory of pricing options.. if you buy a straddle the theory goes that you should not be able to make money by delta hedging against it. thats a stronger form of efficient market theory.. but ya. if you price a straddle on the day before earnings of the closes expiration... that is the "implied move" and its not always right.. but it gives you a general idea..

3. ### TskTsk

Yes, it's the markets current guess at RV.

No

5. ### sonoma

Depends.

What do you mean by "expected?" The relationship between the move and the straddle price is best expressed in Bayesian terms, not deterministically.

6. ### atticus

It's a good predictor of var and useful for choosing (strikes) risk-reversal skews.

7. ### cdcaveman

just to make sense of what he said for myself and anyone else.. this is wiki .. most important part is at the bottom to me..

Risk reversal (measure of vol-skew)

Risk Reversal can refer to the manner in which similar out-of-the-money call and put options, usually foreign exchange options, are quoted by Finance dealers. Instead of quoting these options' prices, dealers quote their volatility.

R_{25} = \sigma _{call,25} - \sigma _{put,25}

In other words, for a given maturity, the 25 risk reversal is the vol of the 25 delta call less the vol of the 25 delta put. The 25 delta put is the put whose strike has been chosen such that the delta is -25%.

The greater the demand for an options contract, the greater its volatility and its price. A positive risk reversal means the volatility of calls is greater than the volatility of similar puts, which implies a skewed distribution of expected spot returns composed of a relatively large number of small down moves and a relatively small number of large upmoves.

8. ### atticus

Yeah, and I think it's better to norm. than to use arbitrary strikes (25D)

9. ### cdcaveman

Dollar skew.. in a PF against the ATM vols..

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