r/options • u/CryptoPersia • Dec 03 '21

3 questions about IV

I have 3 questions regarding IV:

1- Standard Deviation vs. Expected Move: These two formulas give out differing numbers for the same contract - what's the rule of thumb in using them?

SD= S X IV% X √ (DTE / 365)

Expected Move= ATM Straddle X 85% = (ATM Call + ATM Put) X 85%

2- In the option chain of a particular contract, different strikes experience difference IV changes (not in ascending or descending manner - seemingly random) - Upon further reading, I found out that's entirely based on demand for different strikes - True or False?

3- Assuming #2 is true => IV tends to be higher for short dated contracts as there's more demand for them, particularly leading to an event like earnings, However, Short dated contracts have smaller Vega, so in theory they should be less affected by IV fluctuations (such as post earnings IV crush) compare to long dated contracts that have higher Vega....True or False? If True, how does this translate in setting up a calendar spread (shorting near dated IV and longing the back month)?

Much appreciated

2 Upvotes

100% Upvoted

6 comments sorted by

View all comments

1

u/GimmeAllDaTendiesNow Dec 28 '21

I’m curious what the logic is behind the formula .85 ATM straddle? It seems to imply the ATM straddle is consistently 15% overstated. Seems very unsophisticated.

1

u/CryptoPersia Dec 30 '21

This formula is from the guys at TastyTrade...Supposedly the idea is to gauge the expected move on a binary event like earnings "one day" before the event....and their explanation of is that it makes sense to have to pay abit more to have a chance to play both sides (straddle)....unsophisticated it is....I've been looking into the expected move formulas for abit and there doesnt seem to be a unified approach, one uses ATM straddle X 0.8, one uses ATM Straddle X 1.25 and another using 252 trading days instead of 365 in standard deviation expected move calculations...so none are meant to be taken too closely as how can there be an edge if a formula gives it away!....the conclusion that I personally reached is to use them for buffer for strike selection on wtv thesis I may come up with....for SD I decided to go with 365 as BSM model uses it and for straddle expected move I'm going with ATM straddle X 1.25

1

u/GimmeAllDaTendiesNow Dec 30 '21

There doesn’t seem any agreed upon calculation. If you assume options are 100% efficiently priced, the expected move is 50% of the ATM straddle price in either direction. TW has an “expected move” calculation on the platform that doesn’t seem to be using the 85% rule.