Selling ATM Straddles

Thank you asap. I know it's not. I was just curious to see how Div_Arb was going to dig an even bigger hole for himself.

 

I suggest also comparing the ATM straddle with a calendar and a butterfly.

 

Shorting straddles = small but frequent profits, with occassional large losses.

Buying straddles = small but frequent losses, with occasional large profits.

Where implied vol = stat vol the expectancy over many, many trades, will be the same for selling straddles as it would be for buying straddles.

 

Chage stat vol above and replace it with realized vol, and I believe that makes the above statement correct. Although the exactly correct statement is,

"Where implied vol function = stat vol function..."

This is because realized volatility is a function, whereas IV is a tangent line of an unknown function at one point in time.

nitro

 

Stat vol = realized vol.

This is because realized volatility is a function, whereas IV is a tangent line of an unknown function at one point in time.

This is wrong.

 

The definitions that I use seem to be the standard ones. For example:

http://www.quantonline.co.za/Articles/article_volatility.htm

Go to section 4.3 and 5.

I quote:

In any event, here is what I mean:

stat = realized only at expiration.

There are a bunch of other "volatilities".

This is absolutely correct.

nitro

 

Nitro, believe what you will. Belief doesn't make it so.

 

I realize that. But I am not trying to be obstinate. If you think I am in error, I would love to learn why!

Nothing is more interesting to me than to learn something new. I do not believe I am in error, but I learn a lot when I am wrong and realize it. I am willing to listen.

nitro

 

Yes, I'd be curious too. I see nothing evidently wrong in your definitions. Maybe the 'tangent' thingy is a bit dubious, but for the rest....

I always read realized vol as the historical (stat) vol at exp of the option, thus looking backward. Imp vol is not really vol but an expression of the current premium level in a handy format to compare with current and future (realized) vols.

As Nitro, always ready to learn some

Ursa..

 

Actually, I think I did err, or at least the statement, while not wrong is also not exact. The correct statement I believe is:

"...realized volatility is a function, whereas IV is the osculating circle of an unknown function at one point in time."

The reason it is inacurate is because the tangent line only shares location and the first derivative with the curve, whereas the osculating circle in addition shares a second derivative with the curve.


nitro