Josh — obviously, you can you reduce/minimize the persistence of the effect on HV of the “big event” by simply reducing the smoothing period of the HV — say, from 20 to 5 — but does this make more [nearly] valid the ongoing comparisons of HV vs IV in terms of whether the options are “cheap” or “expensive”?
There are other models for calculating volatility (EWMA etc) that don’t suffer from the same plateauing effect. We can cover those in up coming videos if there is interest.
The 20 day sample variance is very commonly used in trading platforms to calculate historical volatility. We wanted to illustrate some short comings to that approach so members are aware the HV higher than IV doesn’t necessarily mean ‘cheap’ options.
Like many things in trading evaluating IV is easier than many make it. Simply reviewing the IV over the past year can give you a decent feel for the current levels.
This video gives me a glimpse behind the curtain. And, references some important deficiencies in my own methods. Thanks very much. Are there any supplementary materials, ie work books, that you can recommend.
Also, I see that you used TOS. Si I guess the inference I might draw is that you find it to be a powerful platform. My personal experience with it has not been so positive. Perhaps I need to try harder.
Thanks for the feedback. Yes, I’m on ThinkOrSwim (TOS) and I’m very happy there. The alerts and studies are very robust, the interface is intuitive (at least I find it intuitive) and it’s *actively* developed. The fees are negotiable as well so I personally haven’t found myself lacking too many features I wanted. I believe TradeStation has IV surface plots which TOS lacks however, for the directionally speculative trading I find myself doing much of the time that’s a non-issue.
We are actually working on some materials to cover this and much more. In the meantime any books in the quantitative finance field will typically give you a deeper view however if you don’t enjoy the math you might find yourself bored.
Josh — obviously, you can you reduce/minimize the persistence of the effect on HV of the “big event” by simply reducing the smoothing period of the HV — say, from 20 to 5 — but does this make more [nearly] valid the ongoing comparisons of HV vs IV in terms of whether the options are “cheap” or “expensive”?
There are other models for calculating volatility (EWMA etc) that don’t suffer from the same plateauing effect. We can cover those in up coming videos if there is interest.
The 20 day sample variance is very commonly used in trading platforms to calculate historical volatility. We wanted to illustrate some short comings to that approach so members are aware the HV higher than IV doesn’t necessarily mean ‘cheap’ options.
Like many things in trading evaluating IV is easier than many make it. Simply reviewing the IV over the past year can give you a decent feel for the current levels.
Hope that helps
Josh
Josh,
This video gives me a glimpse behind the curtain. And, references some important deficiencies in my own methods. Thanks very much. Are there any supplementary materials, ie work books, that you can recommend.
Also, I see that you used TOS. Si I guess the inference I might draw is that you find it to be a powerful platform. My personal experience with it has not been so positive. Perhaps I need to try harder.
Thanks for the feedback. Yes, I’m on ThinkOrSwim (TOS) and I’m very happy there. The alerts and studies are very robust, the interface is intuitive (at least I find it intuitive) and it’s *actively* developed. The fees are negotiable as well so I personally haven’t found myself lacking too many features I wanted. I believe TradeStation has IV surface plots which TOS lacks however, for the directionally speculative trading I find myself doing much of the time that’s a non-issue.
Do check out (if you haven’t already) some of the other tutorial videos on implied volatility vs volatility as some of the nuances there are important. ( https://optionmarketmentor.com/2013/02/implied-volatility-jan-2013/ https://optionmarketmentor.com/2013/01/volatility-implied-volatility-and-bollinger-bands/)
We are actually working on some materials to cover this and much more. In the meantime any books in the quantitative finance field will typically give you a deeper view however if you don’t enjoy the math you might find yourself bored.