Friday, March 12, 2010

What Will They Think of Next?

When it comes to trading platforms, I get as giddy as the next guy when exploring new innovative features. My curiosity perks up every time I receive word of a new release looming on the horizon for the platforms I use in my own trading. Though there are no doubt numerous ways to slice and dice data, I appreciate the few times the programming gurus behind the scenes come up with a more efficient way to display pertinent information. I was therefore pleasantly surprised when Livevol Pro's newest build included a whiz bang 3D tool on volatility skew.

[Source: Livevol Pro]

As long time option traders know, each option strike trades at its own implied volatility. The beauty of the 3D vol skew chart is the ability it gives users to compare volatility across different strikes and expiration months. This aids in selecting which options to use when structuring various strategies. Because the skew charts are in 3D, users have the ability to view them from different vantage points to get a better idea of their depth. Wanting to go for the gold, they also added the ability to view a playback of how vol skew has evolved over time. Watching the progression of volatility helps in identifying and better understanding the typical volatility build that occurs prior to important events such as earnings or FDA announcements, as well as the severe volatility crush that occurs following the catalyst.

For related posts, readers can check out:
Volatility Skew and Ratio Spreads
Gaming the Sell off with Put Ratio Spreads
Finding Volatility
The Cycle of Implied Volatility


tim said...

I like Livepro even though I only have free version.

As stock option volatility increases before earnings or FDA announcement, do index ETF options (DIA,SPY,IWM,Q)
increase before Fed announcement or unemployment,retail sales reports and then drop?
If so, is it much and can it be seen in the VIX?

Tyler Craig said...

Hey tim,

I would say that the index options often do see a bid up in vol prior to an announcement, but it is MUCH less than an individual stock's option into earnings. You figure that an earnings can move a stock huge (sometimes 20% plus). How much does a typical economic announcement move an index? Not much in my opinion. Sometimes they have no effect. So I don't think there's enough of a consistent move in vol to exploit with index options on these announcements. I'd prefer to play larger overall moves in volatility, not really related to any one economic release.

If there was a bidup you probably could see it in the VIX, though if I were playing other indexes besides the SPX, I'd probably look at individual vol charts of the underlying I'm using.