IV on $CAR was cheap counterintuitively and trading ideas.

ATM IV for tomorrow is @ 320 right now. Had been in the high 200s all last week. May 1st right now is @ 250, Looks rich right?

Consider these:

1. Yesterday and some days last week had LULD halts, that is 5% move in less than 5 minutes.

Annualize it using 6.5 hrs and 252 trading days and you get ~700%
Use 24×7 and 365 calendar days (relevant for crypto) and you get 1600%

This is RV, What do you say about IV now and what is the play here?

2) Today the move from the peak of 850 to 430 is roughly 50% so RV is 16×50 = 800%

IV cheap or expensive?

The proper approach to IV in Quant sense involves variance budgeting and accounting for time slices. You calculate RV intraday and gap RV for the rest and combine the time slices. Typical number is that overnight variance is 30% of daily variance. Then use that as benchmark for your model to set IV.

This means you could have bought straddles the whole 2 weeks on $CAR and made a bank. You wouldn't even have to be directionally correct. Yesterday with up and down halts you would have been lucky and got paid on both legs.

So why is IV lower than RV? Are MMs stupid?

1. Think in terms of time slices, the RV over the whole term until expiration may indeed come out to the 320 number but for you all that matters is the time slice you traded, that is why options trading is path dependent.
2. This stock is risky, A lot of retail sees a large number and sells options instead of buying. MMs have a lot of delta sitting around and the market has moved a lot. One way to hedge options is with options, you don't always need stock. (Read Taleb, one of his more famous quotes). They are buying the delta they need from you for cheap and making you cross the spread. In a way withdrawing from the market and letting retail bear the risk.. And people wonder why retail is considered dumb money.

Common retail pitfalls:

1. High number, oh I can't afford it or I will sell it instead. Missing the real edge or making the wrong trade by piling the risk.
2. I will go for far OTM options since those are cheap, well smile dictates that IV is higher in that part of the curve, you are paying less in $ but higher in IV making your hurdle to profit higher. for $CAR though the upper end of the curve was flat and this was a fair play. Understanding IV curve matters. Always check spreads and curve before buying.
3. Far out term IV is lower I will buy those, well the far out IV has the near term IV embedded in it else there will be calendar arbitrage. There is no free lunch ever.

If you don't understand the above, don't day trade options you are ngmi. It is perfectly fine to buy long dated cheap options on a sleeper stock where you may have fundamentals driven conviction as a lottery ticket, but don't day trade options.

Use this to structure your trading and have fun. $CAR was an interesting day today, so much to think about. Borrow is at 9% shorts piled on again. It gets more challenging to anticipate the next move. Opportunities may exist but require understanding what I mentioned above.

Also one thing $CAR teaches you is that all that efficient market theory is bullshit. Don't marry yourself to it. What is more relevant is that Options market is efficient because it won't ever give you an easy trade if certain moves are expected in the underlying or if the risk is too high.

Previous posts:
https://www.reddit.com/r/options/comments/1sr1bys/comment/ohd4i8p/

https://www.reddit.com/r/options/comments/1ss72my/april_21_postmortem_on_car_trading/