http://en.wikipedia.org/wiki/Implied_volatility " Implied volatility as a price Another way to look at implied volatility is to think of it as a price, not as a measure of future stock moves. In this view it simply is a more convenient way to communicate option prices than currency. Prices are different in nature from statistical quantities: one can estimate volatility of future underlying returns using any of a large number of estimation methods; however, the number one gets is not a price. A price requires two counterparties, a buyer and a seller. Prices are determined by supply and demand. Statistical estimates depend on the time-series and the mathematical structure of the model used. It is a mistake to confuse a price, which implies a transaction, with the result of a statistical estimation, which is merely what comes out of a calculation. Implied volatilities are prices: they have been derived from actual transactions. Seen in this light, it should not be surprising that implied volatilities might not conform to what a particular statistical model would predict. "
long run do options traders who delta hedge "on a regular basis" make better returns than those who use options as a tool just to buy and sell the "market" without regard to "if" the option are over / under valued ? What do good option traders returns look like relative to a regular long/short fund ? If one understand the model inefficiencies would there not be free money laying all around the markets ?
what I dont get is how the market makers are able to make money on 1 cent spreads in active options. must be the fees.
How about using mark-to-fantasy like some of the listed derivatives today? A stock's price can also be looked at as a kind of implied volatility limit as theta approaches zero. I like to think of IV as a measure of the market's perceived risk at any given point.
Everything is "mispriced" that's why underlying, then the options move ? Sometimes the skew will be leaning then at some random point during the day or next couple days the "options" get it right
what you care which force is greater. I trade options and I am more interested in the black scholes than only the stock movement itself.
I trade options too bubba. Gets a bit old when you have technically perfect positions on that go down the toilet when Uncle Ben opens his gap, so yes, I do care what the underlying does.