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> If you expect volatility to increase If you have high confidence that volatility will increase more than the market expects it to. > buying options is a ver

by evanpw 7y ago

> If you expect volatility to increase If you have high confidence that volatility will increase more than the market expects it to. > buying options is a very safe bet There is no world in which buying options in a volatile single stock is a very safe bet Unless OP actually works at CMG (in which case they're probably forbidden from buying puts), this is gambling, not hedging.

jovial_cavalier 7y ago
>There is no world in which buying options in a volatile single stock is a very safe bet I agree. I didn't pick up that CMG was Chipotle (that's what comes up when I search CMG). Do you think if the underlying was something diversified, this would be a safe strategy? > this is gambling, not hedging. My understanding of it is that in times of high volatility, options go up. If OP expects ^VIX to go up in the future, which I think is very safe to assume at this point, then won't the value of a diversified option go up? Again, maybe I'm confused... I don't really trade anything, so I don't have skin in the game. I just talk about the markets a lot with my friend who is into Quant Finance.
- nostrademons 7y ago
  > My understanding of it is that in times of high volatility, options go up. If OP expects ^VIX to go up in the future, which I think is very safe to assume at this point, then won't the value of a diversified option go up? Only if it's not already priced in. The price of options should reflect the market's expectation of what the VIX will do in the future. If everybody else thinks that things are going to get more volatile in the near future, then prices for options go up now, they don't wait for things to actually get more volatile. So when you're deciding whether buying options is a good deal, you not only have to decide whether or not you think that things will be more volatile in the future, you also have to decide whether other people already know that things will be more volatile in the future. It's pretty dangerous to do this unless you're a statistician with an algorithm that can take all emotion out of the decision. As a (non-sociopathic) human, your natural impulses will be subconsciously influenced by the emotions of the people around you, so when you have a gut feeling that things are gonna get rocky in the near future, it's probably because everyone else already had a gut feeling that things are gonna get rocky in the near future.
  - evanpw 7y ago
    More precisely, you can back out an implied forecast of future volatility from options prices, and the VIX index is actually computed from the prices of options on the S&P 500 index; it's not just trailing realized volatility.

by evanpw 7y ago

jovial_cavalier 7y ago

>There is no world in which buying options in a volatile single stock is a very safe bet I agree. I didn't pick up that CMG was Chipotle (that's what comes up when I search CMG). Do you think if the underlying was something diversified, this would be a safe strategy? > this is gambling, not hedging. My understanding of it is that in times of high volatility, options go up. If OP expects ^VIX to go up in the future, which I think is very safe to assume at this point, then won't the value of a diversified option go up? Again, maybe I'm confused... I don't really trade anything, so I don't have skin in the game. I just talk about the markets a lot with my friend who is into Quant Finance.

nostrademons 7y ago
> My understanding of it is that in times of high volatility, options go up. If OP expects ^VIX to go up in the future, which I think is very safe to assume at this point, then won't the value of a diversified option go up? Only if it's not already priced in. The price of options should reflect the market's expectation of what the VIX will do in the future. If everybody else thinks that things are going to get more volatile in the near future, then prices for options go up now, they don't wait for things to actually get more volatile. So when you're deciding whether buying options is a good deal, you not only have to decide whether or not you think that things will be more volatile in the future, you also have to decide whether other people already know that things will be more volatile in the future. It's pretty dangerous to do this unless you're a statistician with an algorithm that can take all emotion out of the decision. As a (non-sociopathic) human, your natural impulses will be subconsciously influenced by the emotions of the people around you, so when you have a gut feeling that things are gonna get rocky in the near future, it's probably because everyone else already had a gut feeling that things are gonna get rocky in the near future.
- evanpw 7y ago
  More precisely, you can back out an implied forecast of future volatility from options prices, and the VIX index is actually computed from the prices of options on the S&P 500 index; it's not just trailing realized volatility.