In your experience, what have you found to be the most effective way of finding underpriced options? How reliable is comparing current implied volatility to mean historical volatility? Thanks, Neoxx
Historical volatility is a terrible way to guage how cheap or expensive implied volatility is. Implieds lead the historical vols. It's useless.
Do not waste your time for this. All options are price correctly. If they are cheap, may be they have low chance to move.
Quote an IV column based upon the midpoint of the bid/offer. Many off the shelf apps like OptionVue or Microhedge will do, or simply quote it in excel. Use the atm combo vol as the vol for pricing vol skew and under/overpriced values.
I realise the internet's not the most reliable source for information but I read this on www.thepitmaster.com Hopefully I'll understand what this means after I've read Baird's book-
Unless you know what the future volatility will be, it is impossible to find undervalued options. Options are only undervalued in hindsight, not foresight. Relative mispricing due to Vol skew really is quite small and not a viable strategy for the retail trader paying spreads & commissions. However, if you know how to calculate future volatility I think we could do some business together....
============ Actually the pitmaster had 4 well thought points except wouldnt call simply applying those 4 a ''house edge'',by buying. Maverick wondered why call options???; & you may see call options get more underpriced , MUCH more underpriced as long as underlyings keep goING down