Volatility is arguably the single most important option concept, effectively determining the price of almost every derivatives instrument. The AI Volatility Edge platform uses the latest in machine learning algorithms to identify and quantify real-time volatility pricing anomalies that can be exploited with strategies based on SPX, NDX, and RUT index options, VIX futures, and VIX options. The AI Volatility Edge (AIVE) platform provides forecasts and relative value analysis across the entire term structure of volatilities.
Why is volatility so important? Because volatility is synonymous with the value of the option. If you could forecast the future distribution of returns, you would be able to estimate the current value of every option. If you could forecast implied volatility (IV - the market’s estimate of volatility) in the future, you would be able to estimate the future value of volatility indices and the future value of every option. If your estimates of the future return distribution and future implied volatilities diverged materially from the market’s estimates, you could design option and volatility index futures strategies to exploit those targeted pricing anomalies and earn excess risk-adjusted returns.
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Recession Model Forecast: 03-01-2022
In the past, I published the Trader Edge Recession Model every month. After finalizing and rolling out the 32-bit and 64-bit versions of a new comprehensive option volatility forecasting platform called AI Volatility Edge (AIVE) and publishing my latest book (Trading Option Volatility), I have been focusing exclusively on my trading and proprietary research. As a result, I suspended the monthly recession model publication.
Due to increasing coverage of yield curve inversions, rapid inflation, rising interest rates, war in Ukraine, sanctions on Russia, and the prospective increase in recession risk, I decided to carve out the requisite time from my trading and research to publish the March 2022 recession model update.
The war only began in late February, so the full economic impact of the war and the resulting sanctions will not be fully reflected in the data for several months. The same is not true regarding inflation, the less accommodative Fed policy, and the rise in interest rates, all of which have been anticipated for months.
Monthly Update
This article updates the diffusion indices, recession slack index, aggregate recession model, and aggregate peak-trough model as of March 2022.
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