I have a direction spec model which I apply as taking deltas in the options. I had a long at 769.10 with a target of 776, which resulted in the 775 body strike. Sure, earnings should be limit RV. I don't look at charts. I only use RV/IV modeling for target selection (exits), and I didn't look at the decile on the implied. I knew where it was as it's explicit in calendar-modeling, but it wasn't a decision-point.
Thank you, that is very helpful. I am struggling a bit with how to apply these principles to my trade selection but will keep studying, trading, and trying to learn from your examples. One follow-up question: when you state that you "use RV/IV modeling for target selection (exits)," do you mean that if the underlying moves with a RV greater than the option IV that you will exit, or that (for a neutral trade) you decide a limit in terms of x sigmas of underlying movement that you will tolerate before exiting the trade (because that would imply that your expected vol forecast was incorrect), or something else?
its strike risk , or in other words your change in delta/gamma values over the strike space is the risk your taking to sell these vols. some of that isn't so manageable.. gaps etc.. so basically your making the speculation that the edge you believe to have in implieds verse realized is worth taking considering the strike risk you involve yourself in by trading flys or calenders... i'm just making this point.. because its not a pure vol sell. . your selling short term distributions of returns in conjunction with the vol your selling.. i find them very hard to hedge.. you can offset your risk in indices , or have several smaller positions spread across a couple single names.. but i really don't know what i'm doing as far as exits. i'm just sort of thinking out loud for clarification purposes..
I have a small position (<100) in the SDS APR19 40/43/46 fly from 1.88 risk. I like it a lot but can't trade it in OPM accounts as it's a geared-ETF. Looking for 2.40 next week on the VWAP of $43.00-.20.
No, not at all. I don't model positions on RV, but use it for D1 targets when trading the underlying outright, and also for gamma-trading.
realized vol basically says nothing about future vol.. implied vol numbers are good at telling you how much future vol will be realized but not the reverse..
Cdcaveman, thank you--I wonder if my thinking has been off-base then. My impression was that--all other things being equal--a "low" volatility day was more likely to be followed by a "low" volatility day than by a "high" volatility day. Implied vol contains a huge amount of information about the future, but realized vol provides some important context as long as it is used with caution and understanding that shocks such as earnings, economic news, etc. are critical and obviously can't be derived from realized vol. Volatility regimes can exist, with perhaps an extreme example being the S&P going into periods of low volatility for years on end such as in the mid-00s. Taleb in Dynamic Hedging, when describing ARCH/GARCH and its cousins, noted: "[ARCH] assumed that future volatility was linked to its past realizations, each realization having its own weight. Intuitively, it can be described as a process that can be forecast using past volatility data in a decreasing manner (as with the filtering technique). 'Volatility begets volatility,' as the saying goes. A volatile day is more likely to be followed by a volatile day and a quiet one by a quiet one...[GARCH, etc.] are getting closer to a seasoned option trader's opinion, which could be that past information about the price action impacts future volatility, but in some complex way. Subtle sets of rules in the trader's mind help him form his own opinion in a more potent way than these data-processing techniques." Taleb characterized this by noting that traders have "GARCH in their head." (p. 102)
i've read it several times.. at least the first part of the book before it gets to indepth into exotics.. and it highlights the point i was just making..... Garch would be a terrible measure if you were looking at it going into earnings or another event.. as you have pointed out.. and as Taleb has pointed out. Garch attempts to reproduce the persistance of vol.. as in your quote.. volatility begets volatility.. and it has a mean reverting behavior.. but it doesn't scale well (just like other averaging).. ....................and like most "averages" in Talebs own words.. "would you cross a lake that is on average 4ft deep" not to completely discredit realized vol its just i think in most cases over weighted.. besides.. i think you wanna trade relative value in implieds across the space vertically and horizontally.. rather then RV/IV ..