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Bundy,
Thanks for the explanation. I am reasonably familiar with the concept and
importance of volatility in options trading. What I was more interested in was
the specific interpretation of the volatility curves you wrote in AFL.
For instance, looking at the attached chart of DIA, does the interesting
looking crossover of the curves around 3/12/04 tell you something
important?
Steve
<IMG alt="" hspace=0 src="jpg00036.jpg"
align=baseline border=0>
----- Original Message -----
From: "Arthur Sawilejskij" <<A
href="">arthur@xxxxxxxxxxxxxxx>
To: <<A
href="">amibroker@xxxxxxxxxxxxxxx>
Sent: Friday, April 02, 2004 12:30 AM
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: <<A
href="">mailto:arthur@xxxxxxxxxxxxxxx>Arthur
Sawilejskij> >To: <<A
href="">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>
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