Pricing & Volatility
Without a doubt we get our "edge" as options traders by mastering options pricing and volatility. Specifically the fact that long-term implied volatility always overstates the expected market move.
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IV Expected vs. Actual Move

One of the ways we gain an "edge" in the market selling options is because IV tends to overstate the actual expected move of a stock.
IV Expected vs. Actual Move
Kirk Du Plessis
Apr 19, 2021

One of the ways we gain an "edge" in the market selling options is because IV tends to overstate the actual expected move of a stock in nearly all cases. Now we are believers that markets are efficient, in the sense that there is not price edge you can gain picking stocks directionally. But when it comes to option pricing we can prove that selling rich IV has been one of the rare historically and profitable “edges” to trade. The VIX is used to forecast the 30 day future volatility of the S&P 500. In the video above we’ll track the VIX against a chart of the actual realized volatility 30 days from the time of measurement of the VIX. On average, the VIX expected the market to have a slightly more volatile environment than has been realized over the last 8 years. The average difference between the VIX and actual volatility in this period was about 3.25%. So for example, if stock ABC has an expected move of 10% up or down based on current implied volatility then long term the average might actually end up being 8% up or down. IV in this case overstated the move by 2%.

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The "Greeks"
Options traders often refer to the delta, gamma, vega and theta of their option positions. Collectively, these terms are known as the "Greeks," and they measure an option price's sensitivity to quantifiable factors.

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IV Expected vs. Actual Move

One of the ways we gain an "edge" in the market selling options is because IV tends to overstate the actual expected move of a stock.
IV Expected vs. Actual Move
Kirk Du Plessis
Apr 19, 2021

One of the ways we gain an "edge" in the market selling options is because IV tends to overstate the actual expected move of a stock in nearly all cases. Now we are believers that markets are efficient, in the sense that there is not price edge you can gain picking stocks directionally. But when it comes to option pricing we can prove that selling rich IV has been one of the rare historically and profitable “edges” to trade. The VIX is used to forecast the 30 day future volatility of the S&P 500. In the video above we’ll track the VIX against a chart of the actual realized volatility 30 days from the time of measurement of the VIX. On average, the VIX expected the market to have a slightly more volatile environment than has been realized over the last 8 years. The average difference between the VIX and actual volatility in this period was about 3.25%. So for example, if stock ABC has an expected move of 10% up or down based on current implied volatility then long term the average might actually end up being 8% up or down. IV in this case overstated the move by 2%.

No tags found.
Next lesson
The "Greeks"
Options traders often refer to the delta, gamma, vega and theta of their option positions. Collectively, these terms are known as the "Greeks," and they measure an option price's sensitivity to quantifiable factors.
Pricing & Volatility
Without a doubt we get our "edge" as options traders by mastering options pricing and volatility. Specifically the fact that long-term implied volatility always overstates the expected market move.
Lesson
7
of
11
Next Lesson
Lessons
Exit Course