is there a Volatility Doctor in the house?

Discussion in 'Options' started by increasenow, Jan 16, 2010.

  1. is there a Volatility Doctor in the house?...when trading options...what is the most important volatility reading?

    The historical volatility of the Stock?


    Implied volatility of the underlying option?
  2. The most important in what sense?
  3. mikedks


    Both are equally important; the short answer is HV is the baseline to begin your vol forecast. The IV is nothing more than the vol estimate implied by market pricing. Your job is to determine if the IV is accurate and whether it is cheap or expensive and creates an opportunity for your trading. Generally speaking, HV will give you an incite into where vol may be heading. But again, that is the simple answer, so many variables determine IV pricing: earnings, industry/competitor news, rumours, court cases, politics, war, etc...
  4. Do you actually make money with this strategy?
  5. I feel like contributing to this thread, even though I am more of an amateur then an expert, but if my opinion helps, ANYONE feel free to PM me so we can discuss further, I am looking for "TRADING BUDDYS" to discuss ideas with.

    first lets discuss what Historical Volatility is. It a concrete factual and undisputable measure of price movement of an instrument. why? do you ask.. because it is the average movement of the price over a period of time. it is measured in days, weeks, or months. so first you need to make sure you are dealing with HV that is appropriate for your time frame. as the last poster says, once you know what HV is then the Implied Volatility is the premium you are paying on that option over the options time period. if IV is lower than Historical, then you are getting a discount. why? u ask... because the average price over (lets say a month) is 50 HV but you are only paying for a 40IV thus it should move more, and if you are buying you will make 10 vol movement. lets say on the other hand you sold vol, in this last example you would be giving a discount and have an opportunity to lose that same 10.

    but as the other poster said it is more complicated then that because. The HV,which as we discussed is the average over a time period (lets keep it a month), does not take into account that this month there will be earnings, or a release of a new product, or a product recall. like on FSLR maybe the vol is 20 but on earnings they have huge spikes, as per past results, so the IV is 100, but you know the spikes are even greater then that (usually) so even though 100 looks expensive, it is cheap as per what you think. you think the IV is 200. but how do you come up with 200.

    well that is easy, go to an options calculator and plug in the IV and u get the price of the option. so in the case of FSLR if the HV is 20 and it was priced with the IV accordingly then maybe if the underlying is 133 the option is $2. but if the IV is 100 maybe it is $8, but you look on the chart and know a 20% move is possible looking at the support or resistance so you can easily see a $16 move, then you would have no problem buying the 133 at $8 and 100 IV even though it seems like a rip off, but to you its a steal.

    in the end it is all gambling..... or is it? enjoy
  6. HV provides no edge. It's a reference but it's from the past and more often than not has little relevance to today.
  7. Could you provide an example of how you determine that the IV is accurate? Pick the options of any stock. I'll try to follow along :)

    Also, apart from a pending news event, how do you determine if the IV is cheap or expensive. And please, something deeper than current IV is higher (or lower) than HV.
  8. had some thoughts about this after I posted..
    1-honestly, both of them DO NOT MATTER if you know the direction

    2-the Historic Vol really matters only if you are trading like overnight or intraday or 1-2 days and need the stock/option to move

    3-IVol really only matters if you are buying way too far out of the money
  9. mikedks


    Strategy?, what strategy?.

    A Christmas tree is a strategy, as is a Condor, Iron Butterfly, Naked
    Short Puts, buy and hold, that's a strategy. Explaining that HV and IV are equally important, not a strategy.

    You ever do a vol study on a stock? first compare and contrast HV to IV. Absolute first thing you do, no question. Just one small piece of information.

    And you?, two posts to this question from the OP, and you have yet to add anything?
  10. What for?

    What for?

    No, I have nothing to add unless I understand the reason of them being so important to OP. As for you unless you actually make money with them I don't think you are qualified to talk about their importance.
    #10     Jan 17, 2010