Assorted Closing Bits

This is a non-exhaustive list of related concepts:
  • Poorly calibrated IV affects your delta
  • Variance time does not pass uniformly across the calendar — or through the day! The equity trading day starts at 9:30am ET and closes at 4pm. 6.5 hours. At 10:30 am do you think only 1/6 of the variance time has elapsed? Everything we’ve discussed about the calendar applies to intra-day as well. With 0 DTEs all the rage, the importance of measuring near-dated vols well increases in importance. (There is a workaround — ignore IV entirely with short-dated options and cross-sectionally compare straddles or options generally in price space. This is a more data-hungry approach since you will need to rely on raw tick/price data rather than a pre-packaged IV stream from a vendor)
  • The big dividend from using variance time as your ruler is the ability to extract clean vols from surfaces that include events such as earnings.
  • The calendar schedules I showed from Excel are a discrete model…in practice a continuous model is preferable. The words “integrate the area under the curve” might give you nightmares. I used a discrete model for a long time, it’s a worthwhile first step.
  • A practical idea is to create several calendars and have assets “subscribe to them”. US equities on one calendar, energy on another, ags on another, FX/GLD/interest rates on yet another. The tradeoff is that you lose track of what weights you are using in the different calendars if you have too many and sometimes you want to not have such assumptions abstracted away.
  • Knowing how to do these measurements as recently as 15 years ago was alpha. This work was a significant driver behind me moving from trading a single market like nat gas or the oil complex into cross-asset trading across most listed commodities and commodity ETFs (cleaning vols is absolute table stakes in the game of commodity ETF vol arb).
  • I never traded the VIX complex personally. But just from rubbernecking on Twitter I can see many accounts unknowingly confess to having no clue what the implied vol numbers they’re consuming actually mean. It’s hilarious that one of the most technical games in all of equity vol trading attracts so many tourists. There are many cases where it’s like trading an ETF and having no clue that the NAV is not in sight of last sale. Half the money trading at that price is really right, the other half is really wrong and neither side actually knows the difference.