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Hi d,
Try:
http://www.ivolatility.com/help/
http://optionetics.com/education/adv_concept.asp
and here is a good summary from Len Yates of OptionVue Systems:
<clip>
Volatility vs. Price
In stocks, volatility increases as stock prices decline, and volatility
declines as stock prices increase.
The reason volatility increases as stocks decline is presumably because
falling stock prices mean deteriorating business conditions, and
deteriorating business conditions means higher risk from worsened
visibility. This leads to greater daily price fluctuations (on a percentage
basis) and thus, greater volatility.
On the other hand, as stock prices climb, this implies improving business
conditions and greater stability. Thus stocks exhibit smaller daily price
fluctuations, i.e. lower volatility.
Would logic dictate that the converse be true? Does a period of low
volatility presage a drop in stock prices? While logic would not dictate
this (it is false logic to assume the converse is true), it turns out from
historical observation that this is often the case. Does extremely high
volatility mark the bottom of a bear market? Again, very often it does.
When volatility is high, for example, you know that the bottom is near. When
volatility is low, one must be on guard for a potential breakdown. Another
thing is that this should make us want to buy options at market tops and
sell options at market bottoms.
When volatility is low, we can watch for signs of a breakdown and go short
by buying puts. One of the most reliable signals of a breakdown is when the
market begins to fall off the right shoulder of a head-and-shoulders
formation. The best strategy to use would probably be to buy puts, as
options are cheap when volatility is low. If a sell-off ensues, the options
expand from the double effect of falling prices and (very likely) increasing
volatility.
To get more of a bang from a possible volatility increase, one could buy
farther out options, as farther out options expand more when volatility
increases. Of course, buying farther out options costs more money, and they
will respond more slowly to falling prices. However, as a lower risk
position, especially when compared with the "fast lane" nearby options, this
may be appropriate. It is important for the trader to take appropriate risks
according to his own goals and temperament.
Once prices begin to fall, and the options become expensive, if one still
wanted to buy puts to play for further downside, he could switch to buying
deep in-the-money nearby's to avoid paying extra for the newly inflated time
premiums.
When volatility is high, and prices are showing signs of bottoming (i.e. the
chart is showing a double bottom formation), this would suggest going long
by selling naked puts, as options are expensive when volatility is high. If
a rally materializes, the options die from both rising prices and falling
volatility.
However, selling naked puts in the face of a down-trending market that you
believe is about to reverse to the upside is rather like standing on the
tracks in front of an oncoming train and shouting "halt!" It might work, but
it's kind of scary. To reduce the stress to acceptable levels, one can
simply use a small position, but then you don't make much money when you're
right. Another approach is to use a credit spread. While a credit spread
would not respond to declining volatility nearly as well, it does limit your
risk. And finally, there is covered writing and covered combo's (a covered
write plus naked puts), both excellent strategies that put the odds in your
favor by selling expensive options.
In practice, I have found the buying of puts at the start of a breakdown is
far more rewarding than the selling of options (naked or covered) at a
suspected bottom. Long puts expand dramatically during a market sell-off. At
a suspected bottom, sometimes I feel more comfortable just buying a few of
my favorite stocks. If I feel strongly about my timing, I might even load up
with extra shares "on margin" for a short time. Despite what they say about
the risks of buying stock on margin, it can be less risky to do that than
some of the options strategies you might employ at that juncture.
<clip>
-john
----- Original Message -----
From: dingo
To: amibroker@xxxxxxxxxxxxxxx
Sent: Thursday, April 01, 2004 5:26 PM
Subject: RE: [amibroker] Re : volatility indicators to help with option
trading
Got any references on where I can learn more (especially how to determine
"undervalue" and volitility)?
TIA,
d
From: Arthur Sawilejskij [mailto:arthur@xxxxxxxxxxxxxxx]
Sent: Thursday, April 01, 2004 6:31 PM
To: amibroker@xxxxxxxxxxxxxxx
Subject: 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
>
>
>
>
>
>
>
>
>
>
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