The Skinny on Options: Abstract Applications

Heteroskedasticity

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Believe it or not, but heteroskedasticity effectively represents one of the core pillars that we trade everyday as tastytraders. It represents nothing more than a data set that exhibits changing volatility over time. This might seem obvious to those of us who actively approach the markets, but it actually presents a series of problems for the statistician looking to forecast data, specifically market data.

Not to mention, in a market where volatility seems like it has been pinned at a VIX of 10 for as long as we can remember (more of a “homoskedastic” situation, where volatility is constant over time), it can be hard to envision a truly heteroskedastic market. But, if we consider the market over the last handful of decades, we are reminded that the markets are indeed very heteroskedastic. This gives those of us looking to trade volatility’s contraction or expansion, or find opportunities to sell high IVR, some optimism for the future.

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