Thread by @Ksidiii

I think a lot of traders go wrong when thinking about option pricing from a historical look back in a dogmatic approach.

Just because an option is trading “cheap” on a historical look back (1yr/ 5yr etc) does not mean it is a buy. same way an option trading “rich” isn’t a sell

If you are trading vol from a mandate perspective that is entirely different. But vol trading from an absolute return standpoint requires an understanding and a factor implementation of flow. There needs to be a vol forecast that is driven by a catalyst that leads to flow.

You often see research that says “skew is trading in the 99% for XYZ” implying it is a sell. This is wrong and you will get hosed if you are thinking about vol in these terms. You can bleed out for months - years if you are buying an option solely because it’s in the 1%

The edge comes from understanding the dislocation that will be there due to flow in the first place. Ex: if you are trading a relative value vol trade you need to understand why there is a kink in the curve and why that kink should not exist.

Maybe a large buyer/ seller from an institution needed to get their risk in line so they had to lift an offer at some horrible price that created that dislocation and market makers will adjust the pricing at end of day. But simply shorting because it’s rich or buying

b/c it’s cheap, in a blind way is a recipe for disaster.

Always be focused on the catalyst

The edge comes from monetizing the dislocation caused by the catalyst that is ultimately driven by flow

Not simply because something is trading abnormal out of its historical range