The VIX is the current market value for forward-looking volatility. Meaning it's what people are willing to pay right now for what they think volatility will be in the future. It's a forecast, for months ahead. Realized volatility can only be measured in retrospect. You can't know how much a price will swing until it actually swings. Therefore what people do is they forecast the worst case scenario. I mean not the worst case, because the worst would be a swing to $0 per share. But they predict within a reasonable range. So yes, people are risk adverse and that's why they expect the worst. That's why average VIX is almost always higher than average realized volatility. I originally said always, but that's too strong. In 2008, implied was lower than realized because people weren't forecasting an economic crash or its effects.
What makes smart money has nothing to do with estimating volatility. The smart money is the big money and the big money is what moves markets. So they're the ones setting the VIX and moving actual prices. What makes them smart is how they react to volatility through risk management. That's what allows them to consistently make a modest return (on a large amount of capital) rather than gamble it away on risky moves. The smart money also knows how to make money off volatility. If you can sell options to retail traders when there's a large spread between IV and realized vol, then you make money off the premiums. If you buy options when there's a tight spread between the two, you can also make money. You're essentially just betting on how big the changes in price are rather than the direction of the price. Since changes are almost always smaller than predicted...
The strategy isn't mine, it's cribbed from Barclay's. They developed it in response to the meme stock craze. They take stocks, given them a score (the exact method of calculating the score is proprietary). The score measures the spread between IV and realized while also taking into account the historical data for the stock and its sector. Then the ones with the right score, ie the ones with the large positive spread between IV and realized, means you sell options. You make money off the premium because people are paying more due to the high IV. When the spread is narrow, you buy options because premium is cheaper than normal.
I'm not super duper educated on stocks and finance. I got started with GME and have been trying to learn as much as I can because I think it gives me an edge as a leftist to understand how this shit works. It's a lot harder to argue against my criticisms when you can't weasel out of arguments with technical details, like capitalists love to do. It's why I was a big proponent of c/finance when it started. A lot of people who got into this stuff last year stopped after GME floundered. I just kept going and tried to understand why people were wrong and the mistakes made. I've waded through a lot of terrible youtube finance people and stuff to find the nuggets of criticism and real information.
The VIX is the current market value for forward-looking volatility. Meaning it's what people are willing to pay right now for what they think volatility will be in the future. It's a forecast, for months ahead. Realized volatility can only be measured in retrospect. You can't know how much a price will swing until it actually swings. Therefore what people do is they forecast the worst case scenario. I mean not the worst case, because the worst would be a swing to $0 per share. But they predict within a reasonable range. So yes, people are risk adverse and that's why they expect the worst. That's why average VIX is almost always higher than average realized volatility. I originally said always, but that's too strong. In 2008, implied was lower than realized because people weren't forecasting an economic crash or its effects.
What makes smart money has nothing to do with estimating volatility. The smart money is the big money and the big money is what moves markets. So they're the ones setting the VIX and moving actual prices. What makes them smart is how they react to volatility through risk management. That's what allows them to consistently make a modest return (on a large amount of capital) rather than gamble it away on risky moves. The smart money also knows how to make money off volatility. If you can sell options to retail traders when there's a large spread between IV and realized vol, then you make money off the premiums. If you buy options when there's a tight spread between the two, you can also make money. You're essentially just betting on how big the changes in price are rather than the direction of the price. Since changes are almost always smaller than predicted...
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The strategy isn't mine, it's cribbed from Barclay's. They developed it in response to the meme stock craze. They take stocks, given them a score (the exact method of calculating the score is proprietary). The score measures the spread between IV and realized while also taking into account the historical data for the stock and its sector. Then the ones with the right score, ie the ones with the large positive spread between IV and realized, means you sell options. You make money off the premium because people are paying more due to the high IV. When the spread is narrow, you buy options because premium is cheaper than normal.
I'm not super duper educated on stocks and finance. I got started with GME and have been trying to learn as much as I can because I think it gives me an edge as a leftist to understand how this shit works. It's a lot harder to argue against my criticisms when you can't weasel out of arguments with technical details, like capitalists love to do. It's why I was a big proponent of c/finance when it started. A lot of people who got into this stuff last year stopped after GME floundered. I just kept going and tried to understand why people were wrong and the mistakes made. I've waded through a lot of terrible youtube finance people and stuff to find the nuggets of criticism and real information.