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: 12-01-2020
I made a number of significant improvements to the recession model in January of 2020. If you missed the January recession model post, or if you would like to review the improvements to the models, please revisit the Recession Model Forecast: 01-01-2020. In the following months, I reduced the number of input variables in all of the peak-trough neural network models and expanded the number of individual models. I also further constrained the models, which made them even more robust - especially when interpreted as a single aggregate peak-trough forecast. Finally, due to the very large discrete changes in the economic data due to COVID-19, I capped the maximum standardized deviation above the recession threshold, which is particularly important when reporting the mean standardized deviation. No changes were made to any of the explanatory variables.
Unfortunately, I have been unable to publish the recession model update for the last two months. I have been swamped finalizing and rolling out 32-bit and 64-bit versions of a new comprehensive option volatility forecasting platform called AI Volatility Edge (AIVE). I devoted the last year to designing AI Volatility Edge - which is an integrated collection of AI models based on the latest machine-learning (ML) algorithms. The AI Volatility Edge platform is available on a subscription basis for professional and non-professional option traders. Please see my initial post for more information about AI Volatility Edge.
Monthly Update
This article updates the diffusion indices, recession slack index, aggregate recession model, and aggregate peak-trough model through November 2020.
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