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Hi Phil,
I often exit based on other projections, however the use of such is
valid from a statistical point of view. I do in fact track the
historical vol ratio in such a fashion, with "Low" values being below 50
% and High values at 150%. Mathematically
speaking when the ratio is low the short term market vol
has decreased to less than 1/2 the value of the long term
vol. High values imply that the short term vol has not only
reverted back to the average "mean" but is now trading at an
inflated premium compared to long term vol.
Thinking in terms of standard deviation and probability
it wouldn't be a bad idea to take profit on a long vol
position initiated on a low value, and with the market
now trading at a value greater than 150. I am not sure you
could trade this in a totally mechanical fashion
though. You will need further confirmation from other
stuff as to the best exit and entry. One thing a lot of
option traders forget is that volatility is never "high" nor
"low" . It is "relative" ! Highs can always go a lot higher and lows can
go a lot lower.
Regards,
Walt Downs
CIS Trading
http://cistrader.com
Nixon(MLS) wrote:
>
> Hi Walt,
>
> I am interested in your use of the Hist Vol ratio which I have used for
> breakout trades in futures but not using options. My question relates to
> your exit strategy. Have you have ever found the Volatility ratio useful
> in telling you that you should be out of the trade (for profit or loss)?
> Perhaps if you get a move from sub 50% to some higher level, say 100% or
> 150% or perhaps even to some average (or "normal") level of the ratio?
>
> Man thanks
>
> Philip
>
> > Current Positions in Markets:
> >
> > Dec Cotton -- Long ATM option straddles
> > Dec Coffee -- Long ATM option straddles
> > Nov Soybeans -- Long Calls
> > Jan Soybeans -- Long ATM option straddles
> >
> > In the case of each commodity listed, these trades all have a high
> > probability of profit given market circumstances. I use an indicator
> > that combines psychology and mathematics to determine when an option
> > is underpriced, when people will be ready to buy and sell, and when
> > the likelyhood of volatility "spikes" are present. Good tools in the
> > public domain for tracking such opportunities are low ADX readings
> > and historical vol ratios of 6 days and 10 days compared to 100 days.
> > In addition, I pay particular attention to patterns that are condusive
> > to sharp breakouts (Triangles mostly).
> >
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