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The Omega Man wrote:
>
> > What is the "Implied Volatility" of a stock that you can download with
> > HISTORYBANK?
>
> > I suspect it is the IV of the "at the money" options.
> >
>
> Cool. Who is using this to trade with? How do you use it? If the I.V. is
> less than the actual vol. then you'd be better off owning options than the
> stock outright? If the I.V. is greater than the actual vol. then you'd be
> wise to sell covered calls? What's this I.V. used for?
>
I only do futures in a very small account, so right now i buy options.
I had 2 good runups with options in the past but havent fared so well
this latest period. Someone has said I was just lucky in the past and
in part that's probably true. But maybe if I pay more attention to iv,
etc. I can skip the sucker's trades. So I am interested in feedback on
the discussion which follows
I think iv vs underlying volatility (which I'll call UV *) is one way to
decide whether to buy or sell options. However, IV is *usually* higher
than UV, at least in futures. This reflects that there's a chance that
the underlying will go beyond the boundaries of what's likely according
to the *current* underlying volatility. If the underlying always stayed
within the statistical expectation of the UV, then it would always be a
good bet to sell options if IV > UV. As it is, it probably still is,
but less so than the 98.7% Odds courses would have you believe. And
only if you have a backup plan or the capital to absorb the rare big
move against you. Or are selling covered calls or puts.
Another way to use iv is to compare it to normal ranges of iv for the
particular commodity. If coffee UV is 25% and IV is 35%, at first
glance that's a bad buy. But if, on average, the IV usually goes up to
45% in the summer, plus you get a buy signal in the futures, buying a
call might be a good bet even tho it's "expensive" according to IV vs.
UV. In fact I believe that during the recent freeze scare even waay out
of the money options doubled or tripled just from the iv increase which
went to about 60%. (It'll be the example Ken Roberts uses for the next
couple years in his option course which touts buying waaaaaaaaay out of
the money options and holding them.)
Conversely, here's a bad trade I did. On May 5 I bought an Oct sugar
750 call. Even tho the futures is up 70 pts or so the option is worth
only what I paid for it (13).
Not only is this waaaaay out of the money the IV is about 50%. Normal
iv for sugar is about 25% with a slight bias up to 30% in the summer.
So what are the chances of higher iv helping me? Low, in fact iv is
apt to decline.
If you can reasonably expect that iv will go up, then an out of the
money opt. might be ok. You now have a + tendency to counteract the -
infl. of time decay. But if iv is already unusually high, then it's
more dubious. Of course iv could go higher still, but the averages
arent' with you.
All these comparisons are done with at the money iv's. Once you decide
you want to buy/sell you could look at the skew to see how much more
expensive the out-of-the money options are.
Conrad Bowers
[* UV is usually called historical volatilitly but it gets confusing
using this term if you are also mentioning looking at past averages for
iv.]
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