|
PureBytes Links
Trading Reference Links
|
It is a pretty simple calculation. I merely took the VIX...currently
about 34%......this reprsents an annualized number...and converted it
into a one day estimate.
The vix assumes about 300 observations a year for volatility.
Converting a yearly number to a daily number is simply taking the year #
34% and dividing it by the square root of the days. The square of 300
is about 17. I'm doing very rough math to keep it easy. 34% annual vol
divided by 17(to convert to daily)is 2%.
A one std deviation move would be +/- 2% (this should happen about 68%
of the time.
A two std dev move would be +/- 4%
A three sd move would be +/- 6% and this should/could occur about 1% of
the time.
With a Dow at 7600 this equates to about a 450 point move which we Could
see more frequently than once every ten years.
The fact that we had one soon thereafter is sort of indication that we
are really in a very volatility market.
In previous posts I've talked about the "fat Tails" condition which
actually distorts implied vol and of course the VIX. Real implied, if
the price distribution were normal, would be lower. Except for the last
decade we have lived in a period of non normal distributions...the
condition of fat tails. Fat tails are probably associated more with the
state of technology and trading cost(TOO LONG TO POST THE WHOLE
CONCEPT),but essentially because it's cheaper and easier to trade, there
is much more trading and therefore the market moves and stock moves are
probably bigger than expected.
I did a seminar this morning for an Omega users group in 1000 Oaks
California and the topic of key interest was vol. Vol is what short
term option trading is all about...and one should have a good
understanding of it....a real opinion of where it will be on the next
day...or they should avoid short term trading.
I know it sounds like a tease...but people who understanding option vol
have been coining money all year. There were actually a series of
parties in Chicago Tuesday night after the market break. The kind of
success stories being tossed around all had $1,000,000 plus numbers
attached to them.
If you want to learn more a must read is Shelly Natenberg's book on Vol
based trading.
Good luck.
A two std deviation move would be +/- 4%
|