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Hi Walt,
I did a bit of re-reading of some of Larry Connors stuff after I read your
first post and see that he has a strategy of writing strangles when 10day
volatility reaches 165% (using the examples of Gold and Silver, I guess
this high value may differ for other markets and would require a little
research) of 100day volatility looking for mean reversion contraction in
volatility. This strategy could also be used as an exit point for
volatility expansion trades.
regards
Philip
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> From: Walt Downs <knight@xxxxxxxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Subject: Re: GEN: trades anyone?
> Date: 12 September 1998 12:51
>
> 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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