No volatility forecast

Discussion in 'Options' started by spreadn00b, Dec 16, 2006.

  1. Other than a synthetic long or short are there other strategies that can be used when one is unsure about implied volatility going forward? If I'm confident the underlying is going to move one way or another, but the IV is right in the middle of it's range, it's hard to say which strategy to apply. I suppose based on my forecast of the underlying I could make a volatility forecast. If I'm expecting a big bullish move, I'll forecast the IV to go down. If I'm expecting a big bearish move, the IV to go up. Although that's not always true (look at GE, for example, big move up on Friday and IV went up too).

    I'd be appreciative of anyone's ideas.
     
  2. If you want to minimize the impact of volatility movement on your position, you should consider doing some type of spread trading. Volatility impact on one side of the trade would tend to be offset by the other side of the trade. That's a start.
     
  3. Thanks for the response.

    Yes, that's definitely a start and it's what I do, but I really wanted to eliminate volatility as a variable as much as possible. I was wondering if there might be some ideas other than strike selection on a spread. I'm sure it's a lot like trying to neutralize theta, you'll pay in some other way (i.e. more dollars at risk, lower reward). I suppose picking your strikes as close to the money as possible would probably be the best for attempting to neutralize volatility.

     
  4. MTE

    MTE

    Actually, it is the ATM strike that has the highest vega. Shorter term options have lower vegas than longer term options so something like a near-term vertical spread would neutralize the vega.
     
  5. Thanks for the response, I obviously have some more research to do.

     
  6. Impossibility? Or possibility, then how?
     
  7. Vis a vis an unknown future IV, how would a synthetic long be better than the natural long?

    If you expect a "big" move, do you expect that IV will significantly alter the profit from that move? (assuming that you pick the correct direction)

    And if you predict and get that "big" move, why would you want to limit the gain by doing a spread?
     
  8. wayneL

    wayneL

    ATM verticals, but as Spin points out, the cost is capped upside.

    You could always go deeeeeeeeeeeeep ITM longs, though not without downsides as well.
     
  9. Come on, if you are so sure about the direction, just long or short the underlying. Why do you need options ?
     
  10. erol

    erol

    leverage?
     
    #10     Aug 23, 2009