Means little to me. I don't consider it for trading. Seems the best play is to fade the VIX when it spikes "high enough". Doesn't play well for "buying when it's cheap", as it can stay cheap for extended periods. Of course volatility is a big factor in options. How to take advantage of "mispriced" volatility is another and potentially complicated exercise.
Interesting topic. There is no simple answer for the definition of volatility. I believe it has to be defined for a given symbol/index AND a time period. Vix is only one facet of the SP500 implied volatility (an approximately 30 day period, with a return value normalized to 1 year). As a scalper I am more interested into knowing the volatility for the next 2 minutes for exemple.
Don't obsess with any vol-figure or measurement. Just pick any closed-form method of calculating IV. Model index IV and predict surface inside +/- 25D.
Philo, Very nice questions for a noob. Surprising. "Do you look at term structure vol? Do you look at individual strikes implied vol?" -My favorite of them. This is what trading options is really about.
May I ask what does "closed-form" method mean? Are you talking about calculating variance/standard deviations? Also I want to ask you since you are experienced... Why do you choose to model your own vol? Why not rely on the numbers that thinkorswim and other platforms provide? I'm playing devils advocate here (kinda). +/- 25D is 25 delta correct?
Why is it your favorite? What do you look at in the term structure and strikes as means for trading opportunities? If the market moves drastically and the term structure shifts to backwardation would you take advantage of this? What about the normal contango? I'm curious to see how traders use these events.
For me, options trading is not about betting. It is about knowing the relationships between those different strikes and different months and how they (should/must) move with one another. As they begin to move its a matter of picking pieces out of line, spreading something in-line or better yet -something out of line in the opposite direction. Locking in that favorable spread, hedging out any residual risk caused by that spread, and then watching it fall back into place. Whether it falls back into place when the curve is contango, flat, or backwards. Indifferent. quasi-market-neutral, quasi arb trading. 16 years w/o a losing month so I never saw the need to deviate. As a person I worked with (whom I disliked tremendously, but nonetheless respected) used to say. "A trade is only as good as what you can do against it. Everything else is speculating."
Very interesting. Are you a retail trader trading your own capital? Or? I'm assuming you are a spread trader? This is an area I'm interested in as it seems to present better opportunities and less risk. Instead of trading the 2-year bond I could trade the spread between the 2 year and the 10 year for example.
That last example... One no better than the other. Can explain later but right now I need to drive 6 hours to kennel my dog, so I can travel tomorrow. Will explain later.
First, Keep asking questions Philo. There are no dumb questions. Find smart people and start bugging them. That has been very important for my growth. Second play around with an option pricer. https://www.cboe.com/framed/IVolframed.aspx?content=https://cboe.ivolatility.com/calc/index.j?contract=77929827-AE96-4F35-B67F-8B2012F0A35E§ionName=SEC_TRADING_TOOLS&title=CBOE - IVolatility Services With that said, your original question covers way too much. Start with something specific and work your way up. I'll try and give you a little insight on the basics (all that I know) of vol. For more information, start bugging @destriero, he is very open and will give you one month of research just from asking one question. In regards to vol. Don't even think about it as volatility. Think about it as the option price. How is this option priced? Once you graduate from that, think about, how is this option priced vs other options in the chain? You will find that the easy way to compare everything is through a volatility number. The VIX is very similar to SPX IV. It's a little more complicated and is probably not a great place to start. IMO start with a single option. Answer these questions: What is the Implied Volatility of this option? What affects the price of this option the most? Why might this be the Implied Volatility? Can I price this option better? Why?