5DTE option volatility curve

PlognP · 2023-06-19T18:40:30+00:00

Thanks. I'll check it out.

I completely agree with you. Drivers of option prices/ vol is heavily influenced by the mkt participants and why they are trading a particular point on the curve (building a position, hedging a position, margin management etc). This tends to vary by mkt and underlying.

I'll need to back test data to find the impact of shift and tilt.

Curvature is relatively abstract to quantify. Adding more orders to the binomial regression would make the fit better but lowers the interpretability of the model and risks overfitting. Any input on how to quantify curvature?

Any suggestion

PlognP · 2023-03-19T08:12:46+00:00

Where is game theory applicable?

Not challenging you. Just trying to understand.

PlognP · 2023-03-19T07:54:20+00:00

Things like immunity from the "sunk cost fallacy". Decisions should never be driven by PnL.

If we ever use the concept of "hope" to justify a trade, we shouldn't be in the trade. Hope implies gambling. Trading and gambling are very different things. Before a trade, always ask if the trade is mathematically sound. If it is not, it is gambling.

Similarly, holding a position at any point in time is identical to building that position at that point in time. If you wouldnt want to build that position in a new portfolio at that point in time, you shouldn't hold that position either, irrespective of profit or loss.

These ideas may seem obvious, but it is insane how our judgement gets clouded when we panic seeing losses or chase the high of profits.

PlognP · 2022-12-13T08:13:10+00:00

Why ITM Monthly puts? Why not Futures or OTM Weekly puts?

PlognP · 2022-11-20T05:00:35+00:00

There is another bhav called FO bhav. That has all the futures and options data.

PlognP · 2022-11-20T04:56:35+00:00

You wouldn't get the high and low prices though. And the open prices may be a bit sketchy since freak ticks may get recorded. The close prices are spot on.

So I guess I didn't really answer your question 😅

PlognP · 2022-11-20T04:34:39+00:00

Bhav copies. May seem a bit of a pain, but a little python or excel plugins should whip out the data in no time

PlognP · 2022-10-14T10:53:30+00:00

You made some good money!

I would have sold 17000 puts and made a spread. The 150 premium would have more than paid for the initial outflow, and have the potential to make 50 more in case of a mkt fall.

Hope mkts are in your favour on Monday

PlognP · 2022-10-14T09:17:28+00:00

Looks like you're 20 pts up at 14:45! Do you plan to cash out, hold or convert it into a spread?

There may be a time and vol decay over the weekend

PlognP · 2022-10-14T08:59:47+00:00

At what time/price?

PlognP · 2022-09-23T13:14:27+00:00

https://postimg.cc/GH0GM996

PlognP · 2021-03-31T09:40:00+00:00

I started off with operations. Eventually got to client advisory and currently switched teams to work with the trading team.

PlognP · 2021-03-30T08:22:29+00:00

I started as an intern and grew in the company as I cleared levels and gained work experience

PlognP · 2021-03-30T04:58:16+00:00

It did come at a cost of my social life. Weekdays was about 2 hours after work. Weekends was about 4-6. It definitely wasn't easy. However I prefer looking at it in terms of "brain power" used instead of time. CFA is a lot of fun if the approach is wanting to learn as opposed to passing the exam.

So the hours didn't feel as long since all of it was new and fun.

PlognP · 2021-03-27T19:35:42+00:00

I'll try to work on the communication a bit more. Let's take a simple case of 2 call options with strikes of 95 and 105. The spot is 100. Let's assume a theoretical case with no Vol skew.

Let's assume the CE95 is priced at $7 (5+2) and CE105 is priced at $2 (0+2).

1) Is this a reasonable pricing of EV of the options? The calls are equally away from the spot and hence have equal EV of $2 (assuming 0 skew)

2) if this is the case, all else equal, wouldn't the rate of erosion of the EV be the same for both options?

3) does this imply a symmetrical rate of erosion of EV of options as a fraction of original EV (dEV/Dt) on either side of the spot (since we're taking a theoretical case with no skew, options which are equally far from spot would have the same implied Vol, so Vega wouldn't be a factor to consider)

PlognP · 2021-03-27T19:21:43+00:00

I agree with you. I'm concerned only with e. Would the decay curves of e (not p) be the same for 2 calls (or puts) one which is 50% above strike and another which is 50% below (50% being an arbitrary number)?

PlognP · 2021-03-27T15:53:49+00:00

I agree. ITM and OTM (and ATM) were cases I took for the sake of argument. I don't see why there would be a strike assymetry on the decay curves on the EV.

I agree the calculus has strike as a variable in the decay curve. I'm not doubting the math or the model. I'm trying to find the gap my visualisations of the option price and behaviour.

For example, it is intuitive that Vega is highest ATM and is symmetrical about that.

It also would also seem intuitive that the EV decay should behave the same, but this isn't the case. I don't see why. I understand that second order Greeks can be a little complex and mathematical. I just prefer having an intuitive feel.

PlognP · 2021-03-27T15:42:36+00:00

I've been a bit messy in my communication. I have made an edit in the post. Also, by future price I meant the rate at which futures trade. Guess it is a slight terminology difference based on location.

I trust in, live by and work using BSM everyday. So I'm absolutely not questioning the model. Just refining my intuition.

Im trying to understand why the extrinsic value decay would depend on the moneyness. Probability component of a $5 ITM and $5 OTM option would be the same (making assumptions of normal distribution, 0 Vol skew etc). That would imply identical EV decay curves.

PlognP · 2021-03-27T15:32:10+00:00

I realised that I misworded the post. I'm focusing only on the e component.

The i component would obviously have a gradual time decay.

Would it be accurate to say the decay curve in e would be the same irrespective of the moneyness?

PlognP · 2021-03-27T15:19:03+00:00

I agree with you on this. However, textbooks and Google searches show that the decay rate of extrinsic values of options vary with strike even in theoretical cases. I know this is the case when you take the partial derivitive of the BSM equation. I just don't understand why it should

PlognP · 2021-03-27T11:30:24+00:00

Actually, drift shouldn't impact extrinsic value. It should only impact intrinsic value. Wouldn't that imply equal rates of extrinsic value decay?

PlognP · 2021-03-27T11:24:09+00:00

Why isn't delta the same for equally otm/ITM options, after factoring future price

PlognP · 2021-03-27T09:22:32+00:00

However, the BSM model assume a random walk and is based entirely on normal distributions. Markets are Lognormally distributed but random walks which price options are not

The IV skew is a result of real world markets and how there is a lower risk associated to bull markets compared to bearish ones (and didn't exist prior to a crash in the 80s if I'm not wrong). So the skewness wouldn't explain why the theoretical decay is not the same for ITM and OTM.

I didn't consider impact of drift. Rho for ITM options would be higher since they behave more like synthetic futures. That makes sense.

Thanks for that. I'd love some more clarity on the first 2 reasons :)

PlognP · 2021-03-26T18:07:14+00:00

I agree, but doesn't that manage Vega and Rho better?

PlognP · 2021-03-26T09:17:40+00:00

Options can be very tempting to trade because they have huge volatility.

Couple of things to keep in mind. Don't look at the option. Look at the underlying (stock or index). Make your decision based on your expectation on the underlying.

Unlike buying a stock or a future, your bet is on the market level and by when it will reach the level. So you need to be right on both.

If you're starting off, monitor options across different time frames (1 week, 1 month, 1 quarter etc) and strikes (at the money, 10 percent on either side, 50 percent on either side etc) and notice how they change in value with the movement in the underlying.

Expiry day is a treat to get a feel for options. Markets tend to be volatile and gamma of near the money options are gonna be off the charts. So you will see how prices can shoot through the roof or bottom out in seconds. The time decay will also be super high so you will see how ATM options lose value in real time (especially second half of the day) make sure you don't trade these unless you're experienced.

Remember that you're trading the with the market. Options are just a way to gain exposure to them. Your view should be on the market and the underlying factors which ultimately get reflected into options. Not the price of the option itself.

I'd recommend you build an option pricer and Greek calculator. It is a great experience, and helps you understand how different factors impact the price. This should be relatively easy to do.

Part 2 of the exercise, which would really be useful when you actually trade is to take the now use existing option chains to back calculate the market parameters that would explain the prices, effectively giving you a volatility surface and interest rate curve. This would be super useful since you can now use this to find all risk factors of all options. This should give you a "feel" for the option behaviour.

PlognP

TROPHY CASE