Neither does the guy that is selling them to you. Either I'm not making myself clear, or you've missed my point. Out of interest, what do you and DMO use as a future volatility forecast ?
I guess the truth is that forecasting future volatility is, for the most part, not a part of my thinking. There are exceptions - when volatility is extremely low and I sense excessive complacency, I may forecast a rise in volatility. In that case of course I'm not assuming the correctness of the market's forecast of future volatility (if that's what it is), I'm fading it. If I assume that an option's implied volatility correctly forecasts anything, that would mean that option is fairly priced. And if options are fairly-priced, where's my edge? I'm only interested in unfairly-priced options.
Yes, this is a good way of looking at it. The name "implied volatility" is unfortunate because it makes it difficult I think for people to understand what it really is. Perhaps if it were renamed "true option price adjusted for time remaining and price of underlying," then the whole thing would be clearer.
The guy who's selling them to me may bet on volatility. But one can't know. I don't and won't. Like one can' t know whether he's arbing or closing his own ones. The same way a guy is buying stocks. You can't know if it's a short covering, a long term investment or a short call / long put delta hedge for example. So the point is implied volatility as a proxy of expected future volatility is only an interpretation extracted from a market price on your model, the model you're actually using. Back to your question, there are a lot of ways to try to grab future volatility move. Garch(1,1) is a well known model. Parkinson volatility, Mitchell... are great models to understand in which volatility environment you are and broadly used by exotic options traders. Volatility cones are very interesting tools to grab volatility market...For professionals, there are volatility swaps and variance swaps datas to help you to know where you are on the map. Options react different ways with implied volatility changes. The bigger the maturity, the bigger the sensitivity. But implied volatility for long term maturity won't change usually on a daily basis. Why? Because the change of market perception affect roughly short term ones. It's harder to change a long term sentiment. A 3% index drop today for example would impact short term maturities if one usually see just 1%. But for a 4 years option, it won't. One would need a little more drops like that to change long term market perception. Hence, forcasting future implied volatility matters. Which one for which maturity?
M@W and DMO - Interesting comments , thanks. But I'll stick with the market's estimate of future vol, which has served me well, so far.....
Apologies if this is too basic: is expiration processing affected for after-hours trading? The attached summary seems to suggest it is determined by the last trade from regular trading. TIA.
The SETTLEMENT price for equity options is the last trade during regular market hours. Here's the quote from the document you supplied: <b>The composite or consolidated closing price is set by the last eligible trade reported, for trades made during regular trading hours.</b> Thus, after hours trading does not count when the OCC determines if an option is going to be AUTO-EXERCISED. Any customer may elect to exercise an out of the money option, or issue instructions NOT to exercise an in the money option. Mark