tman - thats because you must be good.. Myself, I can't take parkinson volatility and turn it into a strategy ....
thanks, I do understand what he's talking about, but I thought vol trading involved being long or short vega through volatility strategies. I didn't realize it was locking in a profit by hedging a position over and over again until vol rises or falls to the projected amount. anyways, i'll keep reading!
Of all the greeks, vega is probably the most important, for it influences delta and gamma. Theta is probably second. I use a couple of ways to predict volatility. First, I take a look at the IV's of ATM calls for the front month and for a couple of months into the future (for example, I am now looking at the JAN, FEB, MAR ATM calls). If the IV's are increasing, then traders expect volatility to be flat to lower. If IV's are increasing, then traders except volatility to rise. Next, I look at the absolute value and direction of the VIX. This analysis seems to confirm the results of the IV analysis. So, choosing a "short volatility" option strategy seems to be the way to go. If, for some reason, you except volatility to sharply rise at this point, then go with a long volatility strategy like long straddles, ie. The analysis says otherwise. Here's the problem: If you choose straddle, strangle, iron butterfly, or iron condor, and the underlying takes off, then the directionality of the underlying will kill you--believe me I know. You gotta be right about volatility and direction. For example, during the March 2009 cycle, I used the iron condor strategy, figuring the early march drop was the top of the VIX. Well, the Mar bull put spreads did great. Unfortunately, because of the incredible rebound, my bear call spreads got killed and I lost money on the trade. Same thing happened to me in the September cycle. In March, what I should have done is exit the short calls at the bottom, and then let the short puts ride. September was a problem, for the market just took off--there was no profitable place to cash out the short calls. (I trade futures options on the S&P 500). Obviously, if I simply traded bull put spreads in both cases, I would have been a winner. Hope my experience helps you.
awesome, this is helpful ^ thanks jw I suppose nothing is simple... I'll take a look at this as well, this game gets more and more complex the more I learn . happy holidays to you all!
Not always. When prices make abrupt moves, and the crowd gets too overoptimistic, or too overpesimistic, volatilty shoots higher.
Hi jwcapital, Can you please clarify your post. Do you mean increasing IV means traders expect volatility to be flat to lower and decreasing IV means traders expect volatility to raise? Thanks.
Swing, I think that was a typo on his part - the first increasing should likely be read as decreasing.... "If the IV's are increasing (should be decreasing imo), then traders expect volatility to be flat to lower. If IV's are increasing, then traders except volatility to rise." Increasing IV means increasing Volatility ...
I was going to start a new thread but I'll keep it in this one. I think i must be dense, but I'm having a hard time understanding the practical applications of the "hedge bands". Lets say I'm forecasting a rise in Vol for the underlying. I am then long a straddle, and at the current price I have X deltas. The lower hedge band is Y delta, and upper is Z delta. Does that mean that, at the current price, I leave my position with X deltas if Y < X < Z and only hedge if X < Y or Z < X ? So if I had 300 deltas, and the band was hypothetically 200 - 400, I would be considered flat? I guess what I"m not getting is that this band moves, so do you set your deltas to ~0 to begin with then use the bands? Or do you use the bands outright? I tried the search but nothing came up that I could find on hedge bands.