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Hello Freddie,
Now that you have identified POTENTIAL (and that's the important word)
candidates for an option purchase (let's say a straddle), you could now
look for two scenarios, the option being at historic low IV (you have
already identified DDS as being at a historic low HV) and that the market
has mis-priced the option in your favour.
The easiest way to check this out is to go to, say,
www.ivolatility.com.
You may have to create a login for yourself, I'm not sure.
We can see that the IV for DDS is around about it's nine-month low which
is a good sign. You have calculated the IV of the May expiry at 51.29.
The IV that is currently being used by the market is almost the same -
around 53%. Therefore, you could deduce that this option is currently
neither under or over priced.
Unless you have some other reason to think that the price of DDS is about
to break out (upcoming earnings statement or such like), this possible
(long) trade does not have all of the requirements described above so it
is probably a good idea to continue searching your other
candidates.
Regards,
Kevin
At 17:44 11/04/2003 +0800, you wrote:
Kelvin,
Appreciate your kind help. it's is so concise that I have no
problem inputting them into the explorer. In fact, I ran a couple of
securities and it came up with nice short list. Now I need to understand
the other portion of verifying the implied volatility of the filtered
list.
Below is the list of exploration base on the formula. Let's pick DDS
securities that was filtered by exploration. I have included the option
quote for DDS below. I believe the volatility should be compared at ATM,
correct ? Let's pick DDSQV being ATM, the optionscope volatility base on
strike 12.5, option price 0.65, expiration May, underlying 12.98, the
result is 51.29. How do you compare the implied volatility from here
?
Best Regards
Freddie Ng
At 08:58 AM 4/11/2003 +0100, you wrote:
Hello Freddie,
I'm very happy to be of help.
You could do it like this:
colA
(Std(Log(C/Ref(C,-1)),10) * Sqr(365))
<0.5*(Std(Log(C/Ref(C,-1)),100) * Sqr(365))
colB
(( HHV(H,10 ) - LLV(L,10))/C) * 100
colC
LLV( (( HHV(H,10 ) - LLV(L,10))/C) * 100 ,253)
Filter
colA AND (colB < 1.05 * colC)
If you would like to get more hits, ease out the 5% limit to, say,
10%:
colA AND (colB < 1.1 * colC)
You may also find it interesting to add a volume argument in colD such
as:
V/Mov(V,10,S)*100
A value greater than 100 will identify volume > the 10 day MA. High
volume on a narrow range bar indicates a draw in the bull/bear battle and
is often an advance warning of a breakout.
Email me from Honolulu!
Regards,
Kevin
At 09:47 11/04/2003 +0800, you wrote:
Kelvin,
Thanks for the excellent explanation on differences between IV and HV.
Those formula given by you was very exciting. Do I program them into the
filter of the explorer ?
I did the first formula that filters out securities that are below 50 and
the list of securities were verified to be correct on their HV- Great
!
Then I put the remaining formula into the explorer with the first one, a
list of securities were filtered but I am not sure if I am doing the
right thing as the list looks weird.
Could you enlighten me your approach in using the formula in
Metastock.
Best Regards
Freddie NG
At 09:40 AM 4/10/2003 +0100, you wrote:
Hello Freddie,
It is essential to grasp the difference between the two kinds of
volatility
that we are talking about here when applied to options trading.
Historical
Volatility is the volatility of the underlying SECURITY over the PAST
week,
month, year, whatever, whereas Implied Volatility is a GUESS of what the
volatility of the OPTION might be over the NEXT week, month or year.
'Historical' implied volatility is something else again being a history
of
what everybody's guess was over a period of time. Typically, it is the
average of what the Implied Volatility WAS of the close-to-the-money
strikes BACK THEN.
When trading volatility, one theory is that a period of low volatility is
usually followed by a period of high volatility and vice versa. Because
the
Implied Volatility (of the OPTION) has a big effect on the price of the
Option, the idea is to identify Options having low IV with a view to
buying
them (because they're 'cheap') expecting IV to rise in the future or
identifying Options having high IV with a view to selling them, thereby
collecting a high premium. How you define high/low volatility or
cheap/expensive options is open to debate.
Therefore, from end-of-day data, you can only plot the Historical
Volatility of the underlying security. There is no way that you can
deduce
the 'historical' IV from EOD security prices. As I mentioned before, in
order to do that you must have access to the history of GUESSES. I
apologise for misleading you regarding the availability of free IV data
at
OptionsXpress. If you have a trading account with them, you get that
information free. I have attached a sample chart for you showing what IV
looks like when plotted against HV and the EOD price of the security.
Perhaps it's an indication of how valuable that information is that it is
not simply given away.
One of Don Fishback's recommended strategies is to scan for securities
having very low short-term HV. You can do this with the Metastock
Explorer.
First, identify securities having the 10 day HV less than 0.5 of the 100
day HV:
(Std(Log(C/Ref(C,-1)),10) * Sqr(365))
<0.5*(Std(Log(C/Ref(C,-1)),100) * Sqr(365))
It is traditional to use a calendar year (365 days) for this
calculation.
Then calculate the H/L range within which these securities have traded
over
the past 10 days:
(( HHV(H,10 ) - LLV(L,10))/C) * 100
Now identify those securities whose H/L ranges are within 5% of their
lowest 10 day trading range over the last year:
LLV( (( HHV(H,10 ) - LLV(L,10))/C) * 100 ,253)
I have used the approximate number of trading days in the year (253) for
this calculation.
This exploration should produce a list of securities currently trading at
a
yearly low Historical Volatility and a therefore potential candidates
for,
say, straddle purchases. You must now make use of the Metastock
Optionscope
calculator to ensure that the IV is ALSO currently still low before
progressing further.
I sincerely hope that this helps you.
Regards,
Kevin
At 09:47 10/04/2003 +0800, you wrote:
>
>Kelvin,
>
>I assume option volatility in Metastock is base on EOD although Pro
version
>has both EOD and RT. However I am not sure if you download intraday
data,
>will the option volatility be computed based on the intraday. I
couldn't
>access the formula of it, otherwise we can examine to see what it
does. By
>an chance, do you have its formula ?
>
>Do you have information on Don Fishback, it seems that you know quite
a
>bit. I could modify the period and percentage in Don's indicator to
show
>different coverage on chart. But I really need to understand how to
apply
>it for option analysis - need application notes. I can do paper trade
to
>evaluate it's truth.
>
>I viewed OptionsXpress site, you must open an account in order to
access
>the charting of "Historical IV". Could you demo and capture
a screen of it
>and post it to me. Btw, are you a member there ?
>
>Best Regards
>Freddie Ng
>
>At 06:20 PM 4/9/2003 +0100, you wrote:
> >I have noticed a few posts recently suggesting that the
Metastock Option
> >Volatility indicator plots implied volatility. I suggest a
little caution
> >here. There is not sufficient data in stock end-of-day prices to
calculate
> >the implied volatility of the options on that stock. In order to
do that,
> >you would require the option prices for the complete chain.
Also, bear in
> >mind that options for different strike prices may well have
different
> >implied volatilities. Sometimes the difference is quite
marked.
> >
> >The Option Volatility indicator can only be based upon some kind
of
> >historical volatility formula. Therefore, if you are comparing
this to,
> >say, the Fishback historical volatility indicator, which is
based upon a
> >linear regression calculation, you are comparing like to like
and it will
> >be of no use to you for options trading.
> >
> >In order to see 'historical' implied volatility, you will need
to access a
> >website that has all of that data stored. I think that
OptionsXpress will
> >let you chart 'historical' IV on particular stocks for
free.
> >
> >Regards,
> >Kevin
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