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I too have lost enough money in options tospeak
with some validity :)
I compare my calculations with those from
McMillan's site, the unquestioned guru of options (questioning that statement
forfeits you right to speak about options <go>) - cf
<A
href="">http://www.optionstrategist.com/free/analysis/data/index.html.
His 20-day historical volatility for, say,INTC on
4/19 is 40% - the sqrt(260) yields 41.2% in AB whereas the 365 would yields
48.6%. (BTW your 256 number you mention actually matches his the bestat
40.2% - although it is unclear how you arrive at that number - I may changeto
256).
Your observations on the option variationsover the
weekend strike me as irrelevant considering that the price is a function ofthe
implied volatility - which is a function of the model used etc. Typically
the implied volatility is much closer to the 20-day volatility than the 20%
discrepancy introduced by using 365.
It is too late to delve into the latter points you
claim. Note that normalization typically is a non-dimensional processand
if you measure bars you should normalize bars, at least IMHO.
Feel free to use whatever you choose. I will go
with the numbers that match McMillan. Sorry to get you torqued off
:) I do wonder what you think option pricing has to do with the real world
- but lets save that for another day.
Cheers,
Richard
<BLOCKQUOTE
>
----- Original Message -----
<DIV
>From:
Anthony Faragasso
To: <A title=amibroker@xxxxxxxxxx
href="">amibroker@xxxxxxxxxxxxxxx
Sent: Sunday, April 28, 2002 9:24
PM
Subject: Re: [amibroker] Measure a
stocks' volatility with AB ?
Richard,Since I also deal alot with Options, Here
is my reason for usingsqrt(365).Should you use 365 ( the number of
calendar days ) or 256 ( the numberof trading days), I believe there is no
absolutely correct answer. I use365 mainly for consistency. One of the key
functions in an option'sprice is time ( t). The time component is
expressed in terms offractions of a year and is universally thought of as
Sqrt(calendardays/365) as opposed to Sqrt(trading days / 256).This
365 day calendar effect can be best demonstrated by looking at theprice
behavior of an option from Friday afternoon to Monday morning. Allother
things being equal, the option's price will drop more from Fridayafternoon
to Monday morning than it would from Thursday afternoon toFriday
Morning. That's because you have about 2 3/4 days of time decayof
the weekend instead of the usual 3/4 day of decay during the week.Just to
be consistent with the way options behave in the real world, Iuse
365, the number of calendar days. If you use 256, the options pricedecline
would be smooth every trading day, no matter how many calendardays
transpired between trading periods.There is an even more troubling
problem when you use the number oftrading days, and that has to do with an
assets expected rate-of-returnand risk over the course of a year. The
formula for volatility is theannualized daily standard deviation. Recall
that you calculatevolatility by multiplying the standard deviation figure
by the squareroot of the number of periods in a year. If you use 256(now)
becausethat is the number of trading days in a year, that means you'll
have touse some other number when the number of trading days per year
ismodified. That means adding trading days would increase
volatility,eliminating trading days would decrease volatility. Trouble is,
changingthe available trading periods has already happened several times,
andthe real world results refute this notion.Prior to 1952 the
stock market traded on Saturdays. That meant thatthere were more than300
trading days per year, instead of the current256. When the NYSE made the
change in 1952, did market risk shrink ? No.Did market returns shrink? No.
Would diminished returns even be alogical expectation? No. Because
volatility is a measure of risk andreward, however, that is what should
have happened based on a reductionin the number of available trading days.
Not only are those conclusionsillogical, they're not supported by actual
events.Another example is the proliferation of overseas and 24-hour
trading.Based on the increasing number of trading periods, using 256
dayspreviously would require that you use a larger number now for
certainassets ( like stock index futures traded on Globex). If you used
avolatility calculation model that used trading days in its
calculation,you'd need to increase the number of trading days to the
appropriateamount. With the standard deviation component constant,
volatilitywould have to increase due to the increased number of trading
periods.Some might argue that volatility would remain constant, even
with theincreasing and decreasing trading periods. If that is true and you
usetrading days to annualize volatility, increasing the number of
tradingdays would imply a smaller daily standard deviation figure. But
doesincreasing your sample size ( which you are effectively doing
byincreasing the number of trading days) imply a reduction in the
standarddeviation? Of course not.It doesn't even make intuitive
sense, and is not supported by empiricaldata. Taken a step further,
assuming that volatility remains constantwhile increasing the number of
available trading days means thatinvestors' reactions to news and events
should result in smaller pricemoves. For example, lets say that a stock
goes from $10 to $12. Asmaller standard deviation of the price change
means that the pricechange must be smaller. So the constant volatility
premise means thatinvestors are currently valuing the stock at an
artificially high priceof 12 instead of correctly valuing it at a lower
price, simply becausethe markets are currently closed on weekends.
That is wrong. The stockis priced at 12 because the information aboutthe
stock that iscurrently available warrants a price of 12. Saying that
volatiltiy wouldremain constant when the number of trading days changes
implies that themarket is currently irrational and inefficient due tothe
absence ofweekend trading.Since I believe neither 256 nor 365is
perfect , and because I wish tobe consistent with the way options behave
in the real world ( that is toemulate the time deterioration over the
weekend) I use 365 days in myoption models and my volatility calculations.
:-]]Best wishesAnthonyRichard Alford
wrote:> Anthony, I suspect you should use sqrt(260), the common
number of> bars/year, instead of sqrt(365). The result will agree
with published> results, for instance on McMillan's site. I took the
liberty of> attaching the indicator I use if you have the nerve toopen
it with> all the virus running around.> Cheers, Richard -----
Original Message ----->> From:
Anthony Faragasso> To:
amibroker@xxxxxxxxxxxxxxx> Sent: Sunday,
April 28, 2002 6:49 PM> Subject: Re:
[amibroker] Measure a stocks' volatility
with> AB
?> Hello,
Derek,>> I don't know if thisis
what your are looking for, but this> is
what I> use for
volatility:>> pds=20;//Set your
time period> Graph0 =
StDev(log(C/Ref(C,-1)),pds)*sqrt(365)*100;>>
Anthony>>>>
dereklebrun wrote:>> > Hi
is there any technical analysis way to measure
a> stock's
price> > volatility in AB
?> > If yes, how
?>
>> >
Thanks,> >
Derek>
>>
>> > Your use of Yahoo! Groupsis
subject to the Yahoo! Terms> of
Service.>>> Your use of
Yahoo! Groups is subject to the Yahoo! Terms
of> Service.>>>Your
use of Yahoo! Groups is subject to the Yahoo! Terms of
Service.Your use of Yahoo! Groups is subject to the <A
href="">Yahoo! Terms of Service.
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