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<DIV><FONT size=2>My comments inserted where necessary, my numbers are not all
crunched yet:</FONT></DIV>
<BLOCKQUOTE
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px">
<DIV><FONT size=2>To review the basic DRoex system:<BR>Take the daily H - L
and average it for 5 days. Then multiply it by 16 and<BR>name it
Historical. Compare the Historical to the implied
volatility. If<BR>the Historical is less than implied then expect a
short term rally in the<BR>undelrying until Historical = implied.
DR can correct me if I have<BR>misinterpreted it.<BR></FONT></DIV>
<DIV><FONT size=2><STRONG>Variants on this are:</STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>a/ ATR(5) v/s IV. </STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>The advantage of ATR over plain H-L is the
accounting for significant gaps, which are an increasing part of stock trading
reality.</STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>The limitations of this are that
</STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>1 - intraday IV data is not readily available to
compare ATR or price with ATR of IV.</STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>2 - IV changes based on model used for calculating
it. This is relevant if system triggers trades based on decimal point
differentials, not necessary for back of envelope calcs and
trading.</STRONG></FONT></DIV>
<DIV> </DIV>
<DIV><FONT size=2><STRONG>b/ HV as calculated from log of stdev of price
changes (HV for 5 day period v/s IV). </STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>The advantage of HV is that this is what old school
option traders like to use to compare current IV with HV of underlying to
figure out if IV is cheap or expensive. This school of thought has its merits
and its demerits.</STRONG></FONT></DIV>
<DIV> </DIV>
<DIV><FONT size=2><STRONG>The limitations for using HV v/s ATR are
that</STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>1 - HV (Shelly Natenberg book equations) uses
Closing Price as foundation. This defeats the ATR concept's
usefulness.</STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>2 - Workaround is HV of 5 day ATR (instead of HV of
Close) or some other period's ATR. Depends on how simple or complex you want
it to be.</STRONG></FONT></DIV>
<DIV> </DIV>
<DIV><FONT size=2>The attached two .gifs show why the DRoex system failed in
the 1992 to 1997<BR>period and worked in the 1998 to 1999 period. It has
to do with rising<BR>levels in both the VIX and the annualized 5 day
historical volatility as he<BR>defines it. In the early period the
historical was below the implied most<BR>of the time and generated no
trades. Then the historical and implied began<BR>rising but the
historical rose faster. In the last few years, the Dr's<BR>perceptions
are valid and make a decent system.<BR></FONT></DIV>
<DIV><FONT size=2><STRONG>Hence the Doc probably refers to this as the
evolving phenomenon in hedging as viewed from the Dealer's
turret.</STRONG></FONT></DIV>
<DIV><FONT size=2><BR>Suggestions might be to use another type of historical
volatility. Another<BR>might be to compare Hist and IV
differently. Perhaps normalizing both in<BR>some way would help. A
third would be to use a different endpoint detection<BR>to the rally than H =
IV. The third one alone would make a big difference<BR>in profitability
for the recent period. A fourth would be the radical idea<BR>that
dispells the notion that a system has to work over long periods
of<BR>time. Markets change and systems have to adapt or become extinct
or be used<BR>when they are at their best. Infact there is a trading
methodology based on<BR>"what is working now".<BR></FONT></DIV>
<DIV><FONT size=2><STRONG>This is not such a radical idea, and it is in fact
very valid. A system, while it works, is great. When it doesn't, it causes
tremendous losses and missed opportunity. Think of its usefulness as akin to
using RSI overbought to go short in an uptrend. Where does that get
you....</STRONG></FONT></DIV>
<DIV> </DIV>
<DIV><FONT size=2><STRONG>Thank you once again, DrOEX.</STRONG></FONT></DIV>
<DIV><FONT size=2><STRONG>BobR/Gitanshu</STRONG></FONT></DIV>
<DIV><FONT size=2><BR> </DIV></FONT></BLOCKQUOTE></BODY></HTML>
</x-html>From ???@??? Thu Nov 25 16:49:35 1999
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Status: RO
Jay,
The only way to get around the automatic timeout for PMBe is to re-log-in before it happens. I have a timer set to buzz me every 50 minutes so that I have time to log-off and back in again before I need it for my trades. I wonder what MORON at PMBe thought up this new "feature"!!!!
On Fri, 19 Nov 1999 08:19:53 Jay Becker wrote:
>Yep, they just changed their software over and with it has come a whole
>bunch of problems. Yesterday and today I can't even get in. For the last
>couple of weeks, their system will log you off about every hour...which
>makes for some pretty stressful situations being that you have no way of
>knowing that you have been logged off. Also, their online accounting
>system, that would show the previous day's activity and p/l, account
>balance, all that stuff, is not working either. Looks like they decided to
>make us their guinea pigs!
>
>Jay Becker
>
>
Invest for Maximum Returns with Individual Investor
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