Implied Volatility Estimating/Forecasting

Discussion in 'Options' started by Wait4proof, Dec 25, 2012.

  1. I buy Calls and Puts to capture the UL's movement.
    I have created a BS spreadsheet to help me estimate my profits.
    It is basically a table with:
    Columns being Stock prices (e.g. increments of 0.20 per col)
    Rows being Days remaining (e.g. row1=day54, 2=53, 3=52, etc.)

    At the moment, I plug-in the option's current IV to see the results.
    Then, I plug-in several slightly higher or lower IV's to see the results of each.
    But these higher/lower IV's are a totally mindless sampling.

    I realize that typically UL up means IV down, and vice versa.
    And, I have read elsewhere in the forum the mention of GARCH to forecast IV.
    I'm just wanting to know ahead of time if I am on the right path.

    1) Is it possible to estimate a more realistic IV in my spreadsheet (per cols/rows)?
    2) It GARCH the way, or what is the way?

  2. This is the crux to volatility trading.

    This question is akin to asking: how can I tell if a stock will go up or down?
  3. But I am not asking how to predict movement.

    I am asking:
    When a movement occurs, then what would/should the new IV be at the new UL's price?

    I have no idea how to "trade volatility" - I never studied it.
    But, I would bet that those who trade it (or trade anything else) have a way to calculate what their potential profit is before placing their trade.

  4. If you are trading for delta then implied vol change will be a small if not negligible component of your pnl. Gamma/Theta will be your biggest factor after delta and to you probably theta as gamma will be rolled into your delta pnl.

    This is true 90% of the cases. Only times it will matter is around earnings or other highly anticipated events and some other rare situations.
  5. This has not been my experience.
    Of course, maybe I trade more contracts than the average person.

    My real PnL's vary a couple hundred dollars then expectations.
    It's not that big a deal, it's just that I am someone who wants precision.

    Any recommendations to adjust IV?
  6. How much do they vary in per contract terms?

    If you are trading bigger than the average person, then your delta pnl should be proportionally larger as well.

    Anyhow, if the few hundred dollars matter to you given that you are trading so much size, you have a lot of work ahead. There isn't going to be a strict formula for predicting implied vol.
  7. tayte


    Free vol forecasts from NYU's VLab, you're welcome.