While I am taking some time off I thought I may as well repost some of popular educational posts which many of you may not have seen or completely forgotten about. The first one is from early 2012 and covers volatility and kurtosis:
If you run the math you will find that on a daily basis – annually – the skew is close to normal, and but KURT (i.e. kurtosis) is large. That is due to compounding error of the VIX distribution and overlapping seasonality data. But nothing is black and white – I believe in conditional statistics and offsetting tail distribution. Common sense tells us that when the VIX is > 25 the market will exhibit a different distribution [...]
Today I will introduce an aspect of volatility that you most likely have not seen being addressed anywhere else: realized volatility profiles. First up let’s make sure you all understand what realized volatility (RV) is and how it compares to implied volatility (IV). Simply RV measures the amount and amplitude of price change observed in a financial instrument over time. Big moves to the up side and down side will both produce spikes in RV. As such the volatility we measure or predict always produces an unsigned return – it does not care whether the market goes up or down.
I’m as surprised as you may be seeing equities head straight lower overnight. As you know I was actually positioned both long (ES) and short (NQ) expecting a break out after obvious signs of distribution. Things are clearly very confusing right now – yes, I phrased it this way intentionally. So let me explain what I mean, starting by talking about SKEW.
This is Scott, filling in for Mole this week, and I’d like to continue with our work on System Building and optimization. Today we move away from the intangibles and get deep into the weeds of classifying and measuring market type and looking at how to find a prospective edge, choose an initial stop and an entry technique, and do some preliminary backtesting to work out if we have something real or are we curve fitting.
If you haven’t read my earlier posts here and here you may wish to do so.
In my experience when I hear a trader identify as ” I’m a discretionary trader” this is really subconscious code for “I want to do what I want [...]