PROOF Implied Volatility Overstates The Actual Market Move

http://optionalpha.com - 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%. ================== Listen to our #1 rated investing podcast on iTunes: http://optionalpha.com/podcast ================== Download a free copy of the "The Ultimate Options Strategy Guide": http://optionalpha.com/ebook ================== Still working a day job? Then our "Take 5" segment is for you. 5 mins videos each day on 1 thing you can apply trading options: http://www.youtube.com/playlist?list=PLhKnvfWKsu40z0EnsX0TNqCgUzb8tmM04 ================== Start our 4-part video course (HINT: these videos are NOT posted anywhere else online): http://optionalpha.com/free-options-trading-course ================== Just getting started or new to options trading? Here's a quick resource page we made that you'll love: http://optionalpha.com/start-here ================== Register for one of our 5-star reviewed webinars: http://optionalpha.com/webinars ================== - Kirk & The Option Alpha Team

Comments

1. 0.3569 - Is that the Implied Vol? Historical Vol? 
2. How is IV determined? Is it the market, the buyers and sellers that determine options prices or is it the market maker that causes IV to be high or low. For example, if it's an upcoming news event about a biotech drug approval, you see very high options prices for small and mid cap biotechs. Who's driving up the price? Another example is earnings. Why would IV be higher or lower compared to other earnings cycles and who is determining if its higher or lower compared to previous earnings?