5ETF options volatility three major ways of movement

1. Short volatility strategy

The strategy of short volatility of options mainly refers to the strategy used when the underlying price tends to be sideways or the volatility tends to decrease in the future, which cannot cover the cost of buying individual stock options. The common options are selling straddle strategy and selling wide straddle strategy.

the big advantage of short volatility strategy is that the winning rate is relatively high and the profit curve is more stable. Therefore, although the potential income of short volatility strategy is limited, it is still a good strategy choice, and it can form a good complement with CTA strategy to optimize the net value curve.

II. Advanced volatility strategy

Option volatility strategy can not only be divided from the perspective of long and short, but also has multiple dimensions in time, including volatility term structure and volatility curve. The different maturity dates of options realize the market measurement of the implied volatility term structure of options, which opens up a space for investors to trade the volatility term structure of options.

III. Multi-volatility strategy

The strategy of option multi-volatility mainly refers to the strategy used when the underlying price is expected to fluctuate greatly or the fluctuation degree tends to be enlarged in the future, thus covering the cost of buying options. The more common ones are the buy-across strategy and the buy-wide-across strategy.

The big advantage of multi-volatility strategy is that the losses are limited, the potential profit space is immeasurable, and you may enjoy a high leverage effect when making profits. However, because the underlying price often oscillates or fluctuates slightly, it can not overcome the attenuation of time value and the decline of volatility, and it is often necessary to bear floating losses for a long time to make a multi-volatility strategy.

what is option volatility and how to calculate it?

implied volatility is the expectation of investors in the option market for the actual volatility of future underlying assets, which has been reflected in the option pricing process. Theoretically, it is not complicated to obtain implied volatility, because the option pricing model provides a quantitative relationship between the option price and five basic parameters (the underlying asset price St, the exercise price X, the risk-free interest rate R, the remaining maturity time T-t and the volatility σ).

only by substituting the first four basic parameters and the actual market price of the option as known quantities into the option pricing model, the only unknown quantity σ, that is, the implied volatility, can be solved. Therefore, implied volatility can be understood as the market's expectation of actual volatility.

the option pricing model needs the actual volatility of the underlying asset price within the option validity period. Compared with the current period, it is an unknown quantity, so we usually use the estimated value of historical volatility as the forecast volatility.

a more accurate method is to combine quantitative analysis with qualitative analysis, take historical volatility as the initial forecast value, and constantly adjust and correct it through the analysis of quantitative data and new actual price data to determine the final volatility value.

Source: Option Sauce

Impact of volatility on options

Volatility is an important factor affecting option prices and plays a key role in Black-Scholes option pricing formula. When calculating the theoretical price of options, the historical volatility of the underlying assets is usually used: as the volatility increases, the theoretical price of options increases; When the volatility decreases, the theoretical price of options decreases. Volatility has a positive impact on option price.

for the buyer of the option, the cost of purchasing the option has been determined, and the increase of the volatility of the underlying asset will increase the possibility that the price of the underlying asset deviates from the exercise price, thus increasing the potential income. Therefore, the buyer is willing to pay a higher premium to buy options.

For the seller of options, the increase of the volatility of the underlying assets means taking on greater price risk, so the seller needs to charge higher royalties as compensation. On the contrary, the reduction of the volatility of the underlying assets will reduce the potential income that the option buyer may get, and at the same time reduce the price risk of the seller, so the option price is lower.

The volatility of the underlying assets has a two-way influence on the option price, which reflects the market's expectation of future volatility and determines the attitude and pricing of options buyers and sellers in the transaction.