How to forecast implied volatility?

This thread is moronic...
And explains why brokers have Big Yachts.

All you people who think that future prices and/or volatility can be predicted...
Should stop trading immediately.

 

Add "tops and bottoms" into your subject and I also agree.

 

How about that, we agree on something. The years on the options floor were spent, in great part, trying to get the "implied" (actual pricing) as high as the market would bear, and then reversing back to "historical" based on the B-S models.

By about 1986 or so, everyone had the same computer programs, so most of the edges were gone (at least the edges we enjoyed beforehand). Concersions were all starting to be priced really close to Fair Value based on current interest rates.

Same old techniques (straddles, strangles, butterflies, condors, iron condors, calendars, bull spreads, bear spreads, etc.) were being used by most traders on the floor back then, and some are still being used....but, it all still boils down to who has the best guessat what next month's actual volatilty will be.

My two cents....

Don

 

Guessing next month volatility ?This is not how top funds trade. You know better then this.

I guess

 

Guessing/forecasting, both pretty hard to do, no matter what. My point is that when selling premium based on 30Vol B-S modeling is not too good when IV rises to 45 in the near term.

And, yes, good arb fund managers are a bit more scientific about their approaches - but I even wonder about them at times (as in Amaranth, etc.) - "guessing" with such pure directional bias, not the best thing to do.

All the best,

Don

 

There are ways to attempt to forcast IV. If you're interested you can read Day and Lewis (1992) "Stock Market Volatility And The Information Content Of Stock Index Options" published in the Journal of Econometrics. Also, there is a section in the text "The Econometrics of Financial Markets" by Campbell, Lo, and MacKinlay on IV estimators.

 

I insist on adding lower/upper vols deciles to the list , lol
But event's vols can be predicted.

 

The market makers DETERMINE the IV, don't they?

 

Don,

I agree with you.

No one can predict the next year's IV, but it is a lot easier to predict next minute's IV. The shorter the time frame, the higher confidence with the prediction. Most market makers I believe are guessing a short-term IV.

If your model is better than average, you make money. If you model is worst than the average, you lose.

These statements are based on the assumption that you are a volatility trader. However there are a lot of profitable option traders who are not vol traders.