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↕️Deconstructing the implied volatility of options and capturing the gap in market expectations 🔺Based on the option smile curve and Monte Carlo simulation, quantitatively analyze the long-short divergence in the options market, and help investors grasp the volatility dividend

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implied vol was 11.42% on Feb 19, 2020 realized vol over the next 30 days: 95.33% the market was pricing a normal week. what actually happened was one of the most violent moves in financial history that gap between implied and realized volatility is the single most important number quant desks watch implied vol is what options are pricing in for the future realized vol is what actually happened when implied is far below realized, options are cheap relative to what the market will actually do when implied is far above realized, options are expensive relative to what the market will actually do that spread has a name: the volatility risk premium Citadel, Susquehanna, Optiver built entire options desks around one question: what's the expected value of shorting overpriced vol vs buying underpriced vol? the scatter plot in the video shows every data point over years of history regression line: y = -0.73x + 18.5% translation: when implied vol is low, realized vol tends to explode. when implied vol is high, realized vol tends to collapse that's mean reversion in volatility itself. not price. vol retail buys calls hoping the stock goes up quant desks measure whether the option itself is mispriced relative to statistical expectation, and trade the premium one is a directional bet the other is arbitraging the gap between what people expect and what actually happens > volatility risk premium: documented in academic literature since the 1980s > average VRP on S&P 500: implied vol overprices realized vol by 3-5% historically > data: free from CBOE, Yahoo Finance, options chains > implementation: 20 lines of Python Feb 19, 2020 was a warning the math had been printing for weeks nobody in retail was reading it full breakdown in the video below
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implied vol was 11.42% on Feb 19, 2020 realized vol over the next 30 days: 95.33% the market was pricing a normal week. what actually happened was one of the most violent moves in financial history that gap between implied and realized volatility is the single most important number quant desks watch implied vol is what options are pricing in for the future realized vol is what actually happened when implied is far below realized, options are cheap relative to what the market will actually do when implied is far above realized, options are expensive relative to what the market will actually do that spread has a name: the volatility risk premium Citadel, Susquehanna, Optiver built entire options desks around one question: what's the expected value of shorting overpriced vol vs buying underpriced vol? the scatter plot in the video shows every data point over years of history regression line: y = -0.73x + 18.5% translation: when implied vol is low, realized vol tends to explode. when implied vol is high, realized vol tends to collapse that's mean reversion in volatility itself. not price. vol retail buys calls hoping the stock goes up quant desks measure whether the option itself is mispriced relative to statistical expectation, and trade the premium one is a directional bet the other is arbitraging the gap between what people expect and what actually happens > volatility risk premium: documented in academic literature since the 1980s > average VRP on S&P 500: implied vol overprices realized vol by 3-5% historically > data: free from CBOE, Yahoo Finance, options chains > implementation: 20 lines of Python Feb 19, 2020 was a warning the math had been printing for weeks nobody in retail was reading it full breakdown in the video below

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