After two years of stock and option trading I stopped on volatility trading. My strategy is very simple: 1. Pick liquid, volatile stock like FB for example; 2. Looking for Implied Volatility (IV) percentile below 10% for duration about two weeks; 3. Check for no news; 4. Check for technical setup. Better if it is bullish; 5. Buy at the money, six months Straddle; 6. Placed plus $100 limit sale order; 7. Wait. Sell in 2 â 3 months before Theta sufficient impact. First five in the row trades were successful. When, I have noticed a spike on IV chart but no gain in my straddle. In my example it was FB (Face book) Mar2014 50 Straddle. I have bought it on Oct 02 2013: Stock price = $50 Straddle price = $13.65 Mean Opt. Implied Volatility = 43.87% FB Mar 2014 50 Call implied volatility = 49.88% Oct 15: Stock price = $49.86 Straddle price = $12.96. Mean Opt. Implied Volatility = 97.09% FB Mar 2014 50 Call implied volatility = 48.36% Oct 18: Stock price = $54.26 Straddle price = $14.8 Mean Opt. Implied Volatility = 70% FB Mar 2014 50 Call implied volatility = 53.45% On IV chart we can see a spike up to 100%. That is what I am looking for in my strategy. But my contract FB Mar 2014 50 Call IV dropped on the spike and rose after. Which is good, I took my unexpected profit anyway. Now I understand, in my first five trades I didnât trade volatility. I was lucky that stock rose quickly. In the money Call appreciates faster than out of money Put depreciates. Anyway, I donât have reliable information to utilize my simple strategy. Composite IV is misleading. I am not clear what kind of IV I need. I am trading on Interactive Broker. They donât provide history of individual options IV. It might work for me or might not. I suspect that might be not practical to use that charts, simply because IV probably will rise during the lifetime without sufficient oscillations. Maybe I need IV daily calculation of at the money, six months straddle? In this case, as underline price moves or time pass, I will have to use different contracts??? I am in total frustration, couldnât handle the simple strategy. Could anyone please, clear that out? Thanks.
As you say, composite IV is not the same as ATM IV. So you need to either find historical data for ATM IV, but as you say I have no idea where to find such historical data. You would probably have to make your own database (pain in the ass) Or you could replicate Composite IV via trading a combination of ATM, ITM, OTM options. Probably your best bet?
>As you say, composite IV is not the same as ATM IV. Not the same! - it is $648 or 47% misleading. As IV jumped by 54% (97-43) I was mistakenly expected straddle price to rise by $6.48 (54% * 0.12 vega). Original straddle $13.65. Misleading = 6.48/13.65*100%=47%. I donât understand how possible to trade volatility (any strategy) based on composite IV? We are buying/selling particular options not a composite. If difference between those around 50% and there is no clue how they are correlated, what the reason to use it. The Interactive Broker provides âOption Implied Volatility chartâ. Is anyone out where using that for trading? cboe.com - provides âIV Index meanâ. That was pretty close to IB metric. ivolatility.com â has âImplied Volatility Index (IV Index)â VIX-like measure. Also they have âIndividual Option Contract Implied Volatility ârawâ data (Raw IV)â. It looks like rare and not widely used feature. As a new in volatility trading I believe that I am missing something. For many years, many professionals were successfully using composite IV for volatility trading. Correct me please. I read about Volatility skew and Term structure. It is for more complex strategies, like spreads. If for straddle, it will tell me to buy very short expiration. My strategy does not accept less than 3 months, because many IV charts have oscillation with 3 months period and I like to be sure I have enough time to catch the spike before time decay. And most important the skew it is attempt to trick the market. It is not my goal at all. My goal is to bite out of market pie momentary unsettled volatility. Long Straddle very unlikely will be profitable at expiration but it could be in green many times during lifetime. Please, any thoughts.
The relationship bewteen fixed strike volatility and "composite" volatility is not straight forward. Usually, when people talk of composite vol, it's some sort of fair-variance like product, while a long-dated straddle is mainly exposed to the fixed strike volatility. Composite volatility would be strike-independent and thus, in prense of a skew, will move as the spot moves - in fact, frequently you can see upward movement in fair variance accompanied by the decline in fixed strike volatility.
Sle, Thanks for understanding. Now I feel as not alone. Looks like I need fixed strike volatility data. Is anybody now where can I get it?
It's more complex then that. What you probably want is a history of ATM volatility so you can use it for ranking and compare the current implied for the straddle to it. You P&L is going to be inherently noisy because aside from the vega P&L, you are going to see a lot of sources of noise and chances are your straddle is not going to be ATM when you are exiting the trade. A strangle will keep it's vega a bit better, but you get other problems.
Alex, You may want to ask the LiveVol folks about it. They harp quite a bit about their historical vol database. Click on the Data Solutions tab on their website. It will probably cost a pretty penny. What keeps you from doing it yourself?
There are no âvolatile stocksâ per seâ¦everything is relative to premium. I made a small home run on WMT going long strangles a week ago. And historical vola percentiles can be very dangerous. Just check 2002-2006-building lower lows every month.
There is such a thing as a high volatility name and low volatility name, mainly relating to the amount of idiosyncratic volatility that a stock presents. In general, volatility in high vol names is much less market regime dependent and is driven by the name-specific events and speculation. For a highly volatile stock that generically has a lot of idiosyncratic risk premiums, it's not that relevant - while systematic names and sectors keep losing vol, idiosyncratic names are far more resilient in terms of realisation.
Calc (OHLC, volume, bid/ask, IV & Greeks, stock bid/ask) x 3200 symbols x 24 months = $3,000.00 My watch list is 30 symbols. I need ATM strike, 6 months before expiration, End of Day IV for 2 years percentile chart. Now I have more mess in my mind. Today it is ATM, yesterday it was OTM or ITM. Come on people, what kind of IV index I need to watch before buying a straddle?