How do you know whether volatility will rise or fall in the future?

When I look at the volatility graphs of the instrument I want to trade, all I see is just noise with peaks and troughs here and there....

 

You don't. You have to make assumptions.

 

IMHO: rmorse is correct! However, some people consider volatility a mean reverting play. For example, when volatility is near it's yearly high, some would think odds are better that it will retract, rather than expand. My 8-ball keeps replying "Ask again later." and "Don't count on it."!

 

I was an option market maker for 25 years. I can tell you that you need to plan for the unexpected, but use the past to base your assumptions. That gives the highest expectancy in my opinion.

 

There are a ton of people out there who claim its easier to forecast volatility but i think trying to forecast vol is just as challenging as forecasting direction (specially short term vol).

-gariki

 

They are highly correlated. If you get one, you can often predict the other.

 

Agree, as volatility is a measure of absolute direction. They have no choice but to be related.

 

True Bob. What i mean is after say a big flush down and a vol spike, there is a high probability that vol say an year out will come down but short term as in a month out can still be a coin flip. That said, i am not saying its easy to capitilize on it since the pricing will have this fact built in into it.

 

• Instrument? As in options or the underlying?
• Could you post one of these volatility graphs?

 

I never traded index options. I traded equity options. They had a predictable pattern around earnings and events. Option flow was predictable and option vol was too, for many years. Direction....to me...not so much.