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<FONT face=Arial
color=#0000ff size=2>Got any references on where I can learn more (especially
how to determine "undervalue" and volitility)?
<FONT face=Arial
color=#0000ff size=2>
<FONT face=Arial
color=#0000ff size=2>TIA,
<FONT face=Arial
color=#0000ff size=2>
<FONT face=Arial
color=#0000ff size=2>d
From: Arthur Sawilejskij
[mailto:arthur@xxxxxxxxxxxxxxx] Sent: Thursday, April 01, 2004 6:31
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: Re: [amibroker]
Re : volatility indicators to help with option trading
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
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