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Hello Duc,

Firstly, I tend to focus on IV (implied volatility) over HV (Historical Volatility – or SV – Statistical volatility).

HV only gives you an idea of how the underlying has moved in the past, and is backward looking. It is really a study in statistical standard deviation, and gives you a history of how volatile the stock has been in the past, but only gives a suggestion on how it might react in the future based on your analysis. Of course some volatile stocks can consolidate for long periods of time, then behave in a very volatile fashion in breakouts.

Whereas IV is about what the market is factoring into the future, or how the supply and demand is shaping up both from the market maker perspective (widening spreads, and shifting them to where they think they can extract better margins), and from options market participants (if an institution wants to hedge or foreshadow a move into a stock, they may buy or sell up large quantities of a strike or strikes either in a concentrated time frame, or methodically over time – this can push IV around a lot - up or down, depending on the strategy employed).

This is where good T/A in measuring probabilities is important to trading options in my opinion. If you can measure the likely length of a consolidation, or recognise when a strong move is likely, you can enter with lower volatility for a single option entry, and take advantage later at exit of higher volatility -usually for puts, or at least not suffer much (if at all) volatility crush with calls.

I tend to look at the IV mainly, and consider the range in a time frame, but in context with what the underlying was doing at the time. Generally volatility tends to decline in a gently sustained bullish move, or in benign consolidations, and increase on strong moves, but usually to the downside. Other factors such as potential news items (anticipated announcements, earnings, or media/world events) may effect supply and demand too.

Hence looking at a range of strikes is important to see if there are skews. Sometimes going a but further out of the money is cheaper because an institution is buying the ATM or slightly OTM strike, pushing the price up, while someone may be doing a spread, and selling the next strike up (scenario is someone attempting a bull call spread), hence you can benefit from a good price in the next strike up if going long a call for example.

This is assuming volatility was low for the IV range in your specified timeframe, and you project a small drop at worst (say the range was 20-30 IV, and IV is 22 - probability may be that it would fall to 18 at worst – but this is contextual, hence studying the IV in line with the way the underlying has moved. Hence developing the capacity to estimate and forecast/project possible IV scenarios depending on a range of T/A possibilities is an advantage in my opinion.

HV only tells you what the range of volatility in the underlying was in the past. IV is about what the market is demanding for premium now based on the market makers and market participant’s actual bids now.

Hence I agree with Wayne that you are making your best probability “guess” as to what IV might look like in the future based on your analysis of a range of possible outcomes. I also agree with his view on selecting the right strategy, high IV conditions sometimes works better with spreads to mitigate IV crush risk.

Also you can wait for IV to come back, and enter later, even if the stock is moving in your direction (but hopefully not too fast). A lot depends on if you are trading OTM, ATM or ITM, and how far out in time. If ITM, the deeper you go, the more intrinsic value has a bearing, but your exposure is much higher, and your risk to reward reduces, where profits for OTM plays if correct can be much higher, but theta decay and spread risk is higher too.

So learning to assess wether the market maker is jacking the price up temporarily to pad out their margin when they expect demand to go up (or down for that matter – IV up for buying demand up, IV down for selling increase as people exit on stop for instance – both call s and puts) can greatly reduce risk and augment profit.

Hope that helps Duc.

Regards

Magdoran

<blockquote data-quote="Magdoran" data-source="post: 103010" data-attributes="member: 3955">Hello Duc,Firstly, I tend to focus on IV (implied volatility) over HV (Historical Volatility – or SV – Statistical volatility).&nbsp; HV only gives you an idea of how the underlying has moved in the past, and is backward looking.&nbsp; It is really a study in statistical standard deviation, and gives you a history of how volatile the stock has been in the past, but only gives a suggestion on how it might react in the future based on your analysis.&nbsp; Of course some volatile stocks can consolidate for long periods of time, then behave in a very volatile fashion in breakouts.&nbsp; Whereas IV is about what the market is factoring into the future, or how the supply and demand is shaping up both from the market maker perspective (widening spreads, and shifting them to where they think they can extract better margins), and from options market participants (if an institution wants to hedge or foreshadow a move into a stock, they may buy or sell up large quantities of a strike or strikes either in a concentrated time frame, or methodically over time – this can push IV around a lot&nbsp; - up or down, depending on the strategy employed).This is where good T/A in measuring probabilities is important to trading options in my opinion.&nbsp; If you can measure the likely length of a consolidation, or recognise when a strong move is likely, you can enter with lower volatility for a single option entry, and take advantage later at exit of higher volatility -usually for puts, or at least not suffer much (if at all) volatility crush with calls.I tend to look at the IV mainly, and consider the range in a time frame, but in context with what the underlying was doing at the time.&nbsp; Generally volatility tends to decline in a gently sustained bullish move, or in benign consolidations, and increase on strong moves, but usually to the downside.&nbsp; Other factors such as potential news items (anticipated announcements, earnings, or media/world events) may effect supply and demand too.Hence looking at a range of strikes is important to see if there are skews.&nbsp; Sometimes going a but further out of the money is cheaper because an institution is buying the ATM or slightly OTM strike, pushing the price up, while someone may be doing a spread, and selling the next strike up (scenario is someone attempting a bull call spread), hence you can benefit from a good price in the next strike up if going long a call for example.This is assuming volatility was low for the IV range in your specified timeframe, and you project a small drop at worst (say the range was 20-30 IV, and IV is 22 - probability may be that it would fall to 18 at worst – but this is contextual, hence studying the IV in line with the way the underlying has moved.&nbsp; Hence developing the capacity to estimate and forecast/project possible IV scenarios depending on a range of T/A possibilities is an advantage in my opinion.HV only tells you what the range of volatility in the underlying was in the past.&nbsp; IV is about what the market is demanding for premium now based on the market makers and market participant’s actual bids now.Hence I agree with Wayne that you are making your best probability “guess” as to what IV might look like in the future based on your analysis of a range of possible outcomes.&nbsp; I also agree with his view on selecting the right strategy, high IV conditions sometimes works better with spreads to mitigate IV crush risk.&nbsp; Also you can wait for IV to come back, and enter later, even if the stock is moving in your direction (but hopefully not too fast).&nbsp; A lot depends on if you are trading OTM, ATM or ITM, and how far out in time.&nbsp; If ITM, the deeper you go, the more&nbsp; intrinsic value has a bearing, but your exposure is much higher, and your risk to reward reduces, where profits for OTM plays if correct can be much higher, but theta decay and spread risk is higher too.So learning to assess wether the market maker is jacking the price up temporarily to pad out their margin when they expect demand to go up (or down for that matter – IV up for buying demand up, IV down for selling increase as people exit on stop for instance – both call s and puts) can greatly reduce risk and augment profit.Hope that helps Duc.RegardsMagdoran</blockquote>

[QUOTE="Magdoran, post: 103010, member: 3955"] Hello Duc, Firstly, I tend to focus on IV (implied volatility) over HV (Historical Volatility – or SV – Statistical volatility). HV only gives you an idea of how the underlying has moved in the past, and is backward looking. It is really a study in statistical standard deviation, and gives you a history of how volatile the stock has been in the past, but only gives a suggestion on how it might react in the future based on your analysis. Of course some volatile stocks can consolidate for long periods of time, then behave in a very volatile fashion in breakouts. Whereas IV is about what the market is factoring into the future, or how the supply and demand is shaping up both from the market maker perspective (widening spreads, and shifting them to where they think they can extract better margins), and from options market participants (if an institution wants to hedge or foreshadow a move into a stock, they may buy or sell up large quantities of a strike or strikes either in a concentrated time frame, or methodically over time – this can push IV around a lot - up or down, depending on the strategy employed). This is where good T/A in measuring probabilities is important to trading options in my opinion. If you can measure the likely length of a consolidation, or recognise when a strong move is likely, you can enter with lower volatility for a single option entry, and take advantage later at exit of higher volatility -usually for puts, or at least not suffer much (if at all) volatility crush with calls. I tend to look at the IV mainly, and consider the range in a time frame, but in context with what the underlying was doing at the time. Generally volatility tends to decline in a gently sustained bullish move, or in benign consolidations, and increase on strong moves, but usually to the downside. Other factors such as potential news items (anticipated announcements, earnings, or media/world events) may effect supply and demand too. Hence looking at a range of strikes is important to see if there are skews. Sometimes going a but further out of the money is cheaper because an institution is buying the ATM or slightly OTM strike, pushing the price up, while someone may be doing a spread, and selling the next strike up (scenario is someone attempting a bull call spread), hence you can benefit from a good price in the next strike up if going long a call for example. This is assuming volatility was low for the IV range in your specified timeframe, and you project a small drop at worst (say the range was 20-30 IV, and IV is 22 - probability may be that it would fall to 18 at worst – but this is contextual, hence studying the IV in line with the way the underlying has moved. Hence developing the capacity to estimate and forecast/project possible IV scenarios depending on a range of T/A possibilities is an advantage in my opinion. HV only tells you what the range of volatility in the underlying was in the past. IV is about what the market is demanding for premium now based on the market makers and market participant’s actual bids now. Hence I agree with Wayne that you are making your best probability “guess” as to what IV might look like in the future based on your analysis of a range of possible outcomes. I also agree with his view on selecting the right strategy, high IV conditions sometimes works better with spreads to mitigate IV crush risk. Also you can wait for IV to come back, and enter later, even if the stock is moving in your direction (but hopefully not too fast). A lot depends on if you are trading OTM, ATM or ITM, and how far out in time. If ITM, the deeper you go, the more intrinsic value has a bearing, but your exposure is much higher, and your risk to reward reduces, where profits for OTM plays if correct can be much higher, but theta decay and spread risk is higher too. So learning to assess wether the market maker is jacking the price up temporarily to pad out their margin when they expect demand to go up (or down for that matter – IV up for buying demand up, IV down for selling increase as people exit on stop for instance – both call s and puts) can greatly reduce risk and augment profit. Hope that helps Duc. Regards Magdoran [/QUOTE]

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