Member-only story
A fundamental tenet of options trading is the capture of as much implied volatility (IV) premium as possible as net sellers of options in a high IV context.
To refine my trade entries, management, and exits, I’ve been doing a bit of research to better under:
- (1) backwards-looking, historical, statistical data in order to formulate
- (2) forwards-looking, predictive, probabilistic trading
(Note: It’s important to distinguish between (1) and (2) since they’re often conflated. I’ve had debates with some concerning how power laws describing severity vs. frequency of events are descriptive statistical empirical facts and MUST NOT be confused with predictive and probabilistic in theoretical models.)
One strange phenomenon is the shape of IV as a function of strike price for the same-expiration options across the option chain. Black-Scholes predicts a flat shape, but what we encounter are as we move away from at-the-money (ATM) options to out-of-them-money options is an upward sloping graph.
Furthermore, there tends to be a skew to this graph such that lower OTM Put strike prices tend to have…
