Is estimating implied volatility similar to estimating the market value?

Should we be estimating how the at-the-money implied volatility is changing by observing the order flow? Could you please say a little more about how we can apply this to our trades?

The answer is that you have to learn to estimate the market value from the trades and order flow that you are seeing in the Volcube game. For example, if you have an option worth $3.15 and the broker keeps trying to buy for $3.21, this suggests the market value is higher than $3.15. So you have to monitor the orders and trades to estimate the current market value. Remember to compare the prices of different options in volatility terms. Trading $3.21 in an option theoretically worth $3.15 with 12 vega is equivalent to say $1.15 in an option worth $1.12 with 6 vega. In both cases the market value is half an implied vol point higher than the theoretical implied volatility (6 cents / 12 vega compared with 3 cents / 6 vega). Once you understand this, you can make your prices more accurate and consistent. It takes a bit of practice, but Volcube is perfect for this.

So the short answer to your question is that an important skill that using Volcube can teach you is how to infer the market value from the order flow.

Have a question for the author? Happy to help! Email [email protected].

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