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Doctor,
Could you please elaborate on what difference between the actual and
the option's implied volatility needed to be in order for the
underlying to rally? How many days where used in the short term
volatility calculation?
Many thanks,
Tim Lee
-----Original Message-----
From: owner-realtraders@xxxxxxxxxxxxxxx
[mailto:owner-realtraders@xxxxxxxxxxxxxxx] On Behalf Of THE DOCTOR
Sent: Wednesday, November 17, 1999 11:30 PM
To: realtraders@xxxxxxxxxxxxxxx
Cc: realtraders@xxxxxxxxxxxxxxx
Subject: [realtraders] (No Subject) {02}
Ron,
We're giving away diamonds and nobody is listening.
I can't take credit for the idea.....the original concept was
something I saw
about 10 years ago while sitting on the desk at Salomon Bros. back
when they
traded a risk account. I then discussed it with Jim Yates(May he rest
in
peace)who, as you know was the pioneer in using vol. to forecast price
action. Yates' work never delivered the results all of us hoped it
would,
but his work was always interesting. I always believed Yates had a
good
idea, but placed more value in it than it was shown to deliver. I
then saw
the technique used again while doing some training at a hedge fund ..
where I
wanted to quit my job and stay. They were more successful, in almost
all
market conditions, then anyone I had every seem. So successful that
the
hedge fund was closed to new investors and charged an annual 50% back
end.
I've played with it .. trading the stock - not the option .. for the
last few
months and it has worked. HOWEVER it has worked during a period in
time when
"I believe" it is measuring very very short term momentum. I was on a
desk
this afternoon that began to run the simulation and back test it ...
they
have a system akin to the old David Bruce machine that let's you
simulate and
back text "virtually" anything. We back tested a handful of stock
...ORCL,
APPL, DIS, AMCC, AOL, EMC, INTC, MSFT, FCS and IBM. It worked on
every stock
. every time EXCEPT IBM. It appears to work well when the difference
between the 5 day actual (HIGH/LOW) is much higher than the implied.
The
sample is neither long enough or broad enough to assume it really
works.
I've tried to do it a bit on the S & P using MERC options and one of
the
problems is trading friction ... I will try it with the SPY and QQQ
in the
future. I really wish the MERC option was easier to trade .... I may
to have
to quit my job if it works just so I can trade CBOE. My guess is that
as
long as money flows into the market are based on "short term" effects
and not
asset allocation. One clear challenge in the idea, and what the
problem was
in IBM ... I THINK... is issues weighted in a popular index seem to
have a
BETA related momentum all their own ... which is why doing it on an
index
.. when buy/sell signal exists ...could.
By the way ... if I can really fine-tune it and back test out ...
you'll
never hear about it again. I taught it at a couple of seminars in the
last
few weeks, because I found it so interesting, but I should really
test it
more in different market cycles. It might just be an easy time to
make
money. It also means I schedule a lighter schedule and leave a couple
hours
a day to trade... which is really screwing up my schedule.
Ronald McEwan wrote:
> Dr OEX passed on this gem of a piece of trading info a few days ago.
>
> "This results in an interesting and usually controversial
> trading phenomenon ........ which has lately generated a great many
> profitable trading signals. It appears lately that when short term
> actual vol. of an instrument exceeds the implied vol. in the options
of
> that instrument the underlying almost always rallies "
>
> This works great and is easy to follow if you have access to
realtime
> options quotes and volatility analytic. I had some time to try to
> generalize this idea and use the VIX with a calculation of the
actual OEX
> volatility (calculated from the daily high and low. (as I mentioned
it is
> only a generalization). I subtracted this volatility figure from the
VIX
> (converted to get a daily volatility number). This gave me the
> difference from the actual and the implied Vol. The result is the
> attached chart. The chart is not confirming the recent move up in
the
> OEX. I am suspect of this rally being able to sustain itself.
>
> Ron McEwan
>
> PS thanks Alex
>
> ------------------------------------------------------------
> [Image]
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