|
PureBytes Links
Trading Reference Links
|
Options trading can be risky and volatile - but if you get a handle on it -
the returns and lifestyle are terrific.
Option pricing and profitability is based on the implied volatility -
generally in line with the short term volatility of the stock - but subject
to short term fluctuations in implied volatility and price - meaning that
at times options are overpriced or underpriced in relation to their implied
volatility and short and long term historical volatilities.
While at any time during their term options may be overpriced or
underpriced - over the life of the option it will move towards it's fair value.
So, setting aside directional considerations for the moment - if you buy an
underpriced option - you can expect it to appreciate naturally with the
passage of time (ignore time decay effects).
Also, the short term historical volatility of a stock tends to oscillate or
move or meander around it's long term historical volatility levels.
So, the ideal setup is to buy undervalued options whose short term
historical volatility is below the long term historical volatility level.
The natural tendency of volatility and implied volatility to revert to the
mean works in your favor - considerably compounding any directional benefit
you get from the highly leveraged trade.
If the options were overpriced and/or the short term historical volatility
was greater than the long term historical volatility - the trade may not be
favorable for buying a call, for example, but you could take advantage of
the pricing disparity by selling puts instead - so that any probably
subsequent drop in volatility would directly benefit your sold position.
The converse - if you had of bought the calls in such an unfavorable
environment - and price of the stabilized or only increased moderately and
volatility came off - you would be facing a loss, notwithstanding that you
had the direction right.
Volatility is the most important consideration in options trading - and in
the usa - with higher liquidity and greater volatility - you don't even
have to trade direction - you just trade volatility - generally in spreads
or combinations or adopt a delta neutral strategy.
Bundy
:
>Could you explain how you use these volatility curves? What sort of
>pattern/crossing would tempt you to buy an option, for example?
>
>Thanks,
>
>Steve
>----- Original Message -----
>From: <mailto:arthur@xxxxxxxxxxxxxxx>Arthur Sawilejskij
>To: <mailto:amibroker@xxxxxxxxxxxxxxx>amibroker@xxxxxxxxxxxxxxx
>Sent: Thursday, April 01, 2004 1:46 PM
>Subject: Re: [amibroker] Re : volatility indicators to help with option
>trading
>
>
>
> >Hi, I am currently trade option
> >I am using the following volatility comparing short term and long
> >term volality to time when to buy and sell options.
> >
> >pds1=30;//Set your time period
> >pds2=200;//Set your time period
> >Graph0 = StDev(log(C/Ref(C,-1)),pds1)*sqrt(365)*100;
> >Graph1 = StDev(log(C/Ref(C,-1)),pds2)*sqrt(365)*100;
> >
> >Does anyone has better indicator that they use to compare short/long
> >term volatility?
> >
> >Cheers
> >
> >Henry
>
>I trade options in Australia as well.
>
>I use the following for the volatility
>
>
>
>
>
>GraphXSpace=10;
>
>Plot(StDev(log(C/Ref(C,-1)),20) * sqrt(260)*100, "20 days",
>colorRed, styleThick);
>
>Plot(StDev(log(C/Ref(C,-1)),30) * sqrt(260)*100, "30 days",
>colorBrightGreen, styleThick);
>
>
>Plot(StDev(log(C/Ref(C,-1)),90) * sqrt(260)*100, "90 days",
>colorYellow, styleThick);
>
>
>
>I use 20 and 30 days to compare short term as my option trades are usually
>in options that have 4 to 6 weeks till expiry - 20 to 30 days.
>
>I compare that to the 90 - which is what you want for HV.
>
>One further point - we have 260 trading days in the year - hence my 260
>compared to your 365 days.
>
>I think you will find if you use my figures you will get HV measures that
>accord with the official ones you get from the ASX - the HV values you
>calculate would be way off and not much help in working out if your
>shares/options are overvalued, etc.
>
>Been using the setup successfully for ages - great help for option trading
>and keeps me out of trades where volatility shifts might kill the trade.
>
>Bundy
>
>
>
>
>
>
>
>
>
>
Send BUG REPORTS to bugs@xxxxxxxxxxxxx
Send SUGGESTIONS to suggest@xxxxxxxxxxxxx
-----------------------------------------
Post AmiQuote-related messages ONLY to: amiquote@xxxxxxxxxxxxxxx
(Web page: http://groups.yahoo.com/group/amiquote/messages/)
--------------------------------------------
Check group FAQ at: http://groups.yahoo.com/group/amibroker/files/groupfaq.html
Yahoo! Groups Links
<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/amibroker/
<*> To unsubscribe from this group, send an email to:
amibroker-unsubscribe@xxxxxxxxxxxxxxx
<*> Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
|