I have been completing some foundation work in this area and would love to trigger a discussion from the more experienced hands on this topic. One of the articles I came across is below: http://online.barrons.com/articles/SB50001424053111904184504577518802209654274 written by Bill Luby in 2012. I am particularly interested in these time specific events such as tomorrow's FOMC. My question to the more experienced hands is: If it is known that there is a phenomenon of volatility increasing in the days leading up to the FOMC then why does this opportunity continue to present itself? surely if it is known that a position in a delta neutral spread can be entered and dynamically hedged in the preceding days isn't that trade going to get crowded? I guess there are a whole lot of implications for hedgers and order flow bidding stuff up prior to these events. Would be good to discuss this further here. good trading.
It can be crowded both ways. Bullish vol/Bearish vol. A good example is earnings trades. People assemble statistics on expected earnings, analyst dispersion, and historical moves vs current IV pricing.. They then buy or sell earnings straddles accordingly. The FOMC bets are even more abstract....betting on the FED wording.
Hi xandman. Thanks for contributing to the thread. Thanks for bringing up the subject of earnings trades I have been reading about this also and it is something I will certainly be researching further in the future. I know of a prop firm here in London that trades news events by analysing the wording of key announcements. The trades I am most interested in researching at present are ones which take advantage of the conditions leading up to events where volatility is getting bid perhaps using a TA overlay entry. If anyone is experienced with this type of trading please pitch in.