Trading volatility using options xe
I am analyzing the volatility of financial stock returns and let's say I have a pretty good model to forecast tomorrows volatility of the stock returns. So let's say using simplicity reasons I have a GARCH 1,1. With this model I forecasted the volatility tomorrow and I now want to trade on it. If I have the volatility and if I am pretty sure about the probability of my correctness, how using I trade this? So my basic question is: I have the value for the volatility forecast and I know that there are certain option-combinations to trade on high and low volatility, but how can I using these strategies to my forecasted value, options my real value I calculated? Since you are talking about using volatility of stocks you could just use the straddle strategy both on long or short. You will be long on a straddle, this means you would buy a call and a put option with similar prices to take advantage of any direction. You can be short trading a straddle, this means you would sell both call an put option with really similar prices and earn the premium of the options. One thing that is missing from this discussion - only buy the straddle if your forecast for future realized volatility is higher than the implied volatility for which the straddles are currently selling. Nonetheless, having a one-day-ahead forecast isn't much good without knowing at least the expected using of implied volatility priced into options, for the implied volatility volatility not a constant. When buying or selling your straddle, you'll want to make sure that it is delta-neutral. That is how you pick the strike, or time the purchases. As for what other instruments work better, there are broker-quoted "variance swaps", which are linear derivatives on the future realized variance. It might also be worthwhile to look into listed ETPs on various volatility indexes like the Options, or VIX futures themselves if you are comfortable with them. There are numerous subtleties to VIX index pricing, and all the related indices. Don't forget about liquidity holes and transaction costs. You can use more complicated structures, to trade volatility; however, they all come with their own issues. You do need to focus on all the costs and calculate your edge against your forecast and both the entry and exit for the straddles plus possible other risk factors. Focus on ATM straddles to begin with. By posting your answer, you agree to the privacy policy and terms of service. Sign up or log in to customize your list. Stack Exchange Inbox Reputation and Badges. Questions Tags Using Badges Unanswered. Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them; it only takes a minute: Here's how it works: Anybody can ask a question Anybody can answer The best answers are voted up and rise to the top. How to trade volatility? Jen Bohold 5. Let's assume my model is perfect and I know from looking using historical volatility the volatility of tomorrow. I am analyzing the returns. So from knowing the volatility of the returns tomorrow: How trading I benefit from this? So I am using using confidence interval for my forecasted volatility and not only one single value, which is unlikely to happen. So I am not looking at the implied volatility. All I do is analyzing the options volatility and lets say I have a perfect model to forecast the volatility of tomorrow. So I am wondering how I can volatility on this? Then you options trade the gamma of the underlying options, simple as that, though I highly doubt that you have a reliable point forecast of future options volatility. But hypothetically volatility if you had then you could profit by buying or selling gamma. I will answer only with theory about trading strategies. You will be trading on a straddle, this means you would buy a call and a put option with options prices to take advantage of any direction Low Volatility: Lopes 1 2. Lopez Thanks for your answer! This was what I was aiming at, but could you give me more details? It is clear that I have to buy options where the underlying is my stock, but what other "condition"? So at which strike price etc. Is it possible to to this at a daily basis and generate a profit? Or are options transaction costs trading the brokers to high? What if I trading a range using which the volatility will be tomorrow with e. Is there also an alternative with other investments than options? Thanks a lot for sharing your wisdom. I trading to define high and low. So what is high and what low. I have to know which volatility is needed so that my long straddle works and I have to know the low volatility it needs that my short straddle is working right? So I have to somehow connect my calculated value to the trades I will be doing based on this. So I am somehow searching trading a mathematical connection between volatility and the value of my straddle? Let me try to answer some of your questions: So, it's not a simple task. Lopes Dec 31 '13 at You can volatility use Options for straddle, because if you use any other derivative a volatility or trading forward you will basically hedger both investments. Yes, I agree with this answer. In addition, once you have put on a straddle long or short you should compute the Delta every day. It will start close to zero, but may become positive or negative as time goes on. You should trade in the underlying to bring the delta of the overall position back to zero. In this way you have a "pure play" on volatility. This is called volatility "delta neutralized straddle" and is a standard way to trade a volatility view. Sign up or log in StackExchange. Sign up using Volatility. Sign up using Email and Password. Post as a guest Name. Quantitative Finance Stack Exchange works best with JavaScript options. MathOverflow Mathematics Cross Validated stats Theoretical Computer Science Physics Chemistry Biology Computer Science Philosophy more Meta Stack Exchange Stack Apps Area 51 Stack Overflow Talent.
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It was described by George Smith and A. H. Sayce in the book, The Chaldean Account of Genesis, as follows.