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<FONT face=Arial
color=#0000ff size=2>Thanks duude!
<FONT face=Arial
color=#0000ff size=2>
<FONT face=Arial
color=#0000ff size=2>Thanks to Arthur (Bundy?) to!
<FONT face=Arial
color=#0000ff size=2>
<FONT face=Arial
color=#0000ff size=2>d
From: john gibb [mailto:jgibb1@xxxxxxxxxxxxx]
Sent: Thursday, April 01, 2004 11:32 PMTo:
amibroker@xxxxxxxxxxxxxxxSubject: Re: [amibroker] Re : volatility
indicators to help with option trading
Hi d,Try:<A
href="">http://www.ivolatility.com/help/<A
href="">http://optionetics.com/education/adv_concept.aspand
here is a good summary from Len Yates of OptionVue
Systems:<clip>Volatility vs. PriceIn stocks, volatility
increases as stock prices decline, and volatilitydeclines as stock prices
increase.The reason volatility increases as stocks decline is
presumably becausefalling stock prices mean deteriorating business
conditions, anddeteriorating business conditions means higher risk from
worsenedvisibility. This leads to greater daily price fluctuations (on a
percentagebasis) and thus, greater volatility.On the other hand,
as stock prices climb, this implies improving businessconditions and
greater stability. Thus stocks exhibit smaller daily pricefluctuations,
i.e. lower volatility.Would logic dictate that the converse be true?
Does a period of lowvolatility presage a drop in stock prices? While logic
would not dictatethis (it is false logic to assume the converse is true),
it turns out fromhistorical observation that this is often the case. Does
extremely highvolatility 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. Whenvolatility is low, one must be on guard for a
potential breakdown. Anotherthing is that this should make us want to buy
options at market tops andsell options at market bottoms.When
volatility is low, we can watch for signs of a breakdown and go shortby
buying puts. One of the most reliable signals of a breakdown is when
themarket begins to fall off the right shoulder of a
head-and-shouldersformation. The best strategy to use would probably be to
buy puts, asoptions are cheap when volatility is low. If a sell-off
ensues, the optionsexpand from the double effect of falling prices and
(very likely) increasingvolatility.To get more of a bang from a
possible volatility increase, one could buyfarther out options, as farther
out options expand more when volatilityincreases. Of course, buying
farther out options costs more money, and theywill respond more slowly to
falling prices. However, as a lower riskposition, especially when compared
with the "fast lane" nearby options, thismay be appropriate. It is
important for the trader to take appropriate risksaccording to his own
goals and temperament.Once prices begin to fall, and the options
become expensive, if one stillwanted to buy puts to play for further
downside, he could switch to buyingdeep in-the-money nearby's to avoid
paying extra for the newly inflated timepremiums.When volatility
is high, and prices are showing signs of bottoming (i.e. thechart is
showing a double bottom formation), this would suggest going longby
selling naked puts, as options are expensive when volatility is high. Ifa
rally materializes, the options die from both rising prices and
fallingvolatility.However, selling naked puts in the face of a
down-trending market that youbelieve is about to reverse to the upside is
rather like standing on thetracks in front of an oncoming train and
shouting "halt!" It might work, butit's kind of scary. To reduce the
stress to acceptable levels, one cansimply use a small position, but then
you don't make much money when you'reright. Another approach is to use a
credit spread. While a credit spreadwould not respond to declining
volatility nearly as well, it does limit yourrisk. And finally, there is
covered writing and covered combo's (a coveredwrite plus naked puts), both
excellent strategies that put the odds in yourfavor by selling expensive
options.In practice, I have found the buying of puts at the start of a
breakdown isfar more rewarding than the selling of options (naked or
covered) at asuspected bottom. Long puts expand dramatically during a
market sell-off. Ata suspected bottom, sometimes I feel more comfortable
just buying a few ofmy favorite stocks. If I feel strongly about my
timing, I might even load upwith extra shares "on margin" for a short
time. Despite what they say aboutthe risks of buying stock on margin, it
can be less risky to do that thansome of the options strategies you might
employ at that juncture.<clip>-john----- Original
Message ----- From: dingoTo: amibroker@xxxxxxxxxxxxxxxSent:
Thursday, April 01, 2004 5:26 PMSubject: RE: [amibroker] Re : volatility
indicators to help with optiontradingGot any references on
where I can learn more (especially how to determine"undervalue" and
volitility)?TIA,dFrom: Arthur Sawilejskij
[mailto:arthur@xxxxxxxxxxxxxxx]Sent: Thursday, April 01, 2004 6:31
PMTo: amibroker@xxxxxxxxxxxxxxxSubject: Re: [amibroker] Re :
volatility indicators to help with optiontradingOptions
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 subjectto short term fluctuations in implied
volatility and price - meaning thatat times options are overpriced or
underpriced in relation to their impliedvolatility and short and long term
historical volatilities.While at any time during their term options
may be overpriced orunderpriced - over the life of the option it will move
towards it's fairvalue.So, setting aside directional
considerations for the moment - if you buy anunderpriced option - you can
expect it to appreciate naturally with thepassage of time (ignore time
decay effects).Also, the short term historical volatility of a stock
tends to oscillate ormove or meander around it's long term historical
volatility levels.So, the ideal setup is to buy undervalued options
whose short termhistorical volatility is below the long term historical
volatility level.The natural tendency of volatility and implied
volatility to revert to themean works in your favor - considerably
compounding any directional benefityou get from the highly leveraged
trade.If the options were overpriced and/or the short term historical
volatilitywas greater than the long term historical volatility - the trade
may not befavorable for buying a call, for example, but you could take
advantage ofthe pricing disparity by selling puts instead - so that any
probablysubsequent drop in volatility would directly benefit your sold
position.The converse - if you had of bought the calls in such an
unfavorableenvironment - and price of the stabilized or only increased
moderately andvolatility came off - you would be facing a loss,
notwithstanding that youhad the direction right.Volatility is the
most important consideration in options trading - and inthe usa - with
higher liquidity and greater volatility - you don't evenhave to trade
direction - you just trade volatility - generally in spreadsor
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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