Add training workflow, datasets, and runbook
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Chapter 39: Volatility Trading Techniques 823
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FIGURE 39-3.
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Stock chart of RMBS.
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19. 000 17. 250 18. 875 20010410
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30.000
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22. 000
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14. 000
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' ' : :
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! : : : ; 1 : : 1 r : ! : : : : ; : : : : : i l : l : 6. ooo
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99 M il M :i J ii s b N b J F M il M :i J il s b N b J F h 1
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What this method may be best used for is to complement the other methods
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described previously, in order to give the volatility trader some perspective on how
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volatile he can expect the underlying instrument to be; but it obviously has to be
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taken only as a general guideline.
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CHECK THE FUNDAMENTALS
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Once these mispriced options have been found, it is always imperative to check the
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news to see if there is some fundamental reason behind it. For example, if the options
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are extremely cheap and one then checks the news stories and finds that the under
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lying stock has been the beneficiary of an all-cash tender offer, he would not buy
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those options. The stock is not going to go anywhere, and in fact will disappear if the
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deal goes through as planned.
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Similarly, if the options appear to be very expensive, and one checks the news
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and finds that the underlying has a product up for review before a governmental
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agency (FDA, for example), then the options should not be sold because the stock
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may be about to undergo a large gap move based on the outcome of FDA hearings.
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There could be any number of similar corporate events that would make the options
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very expensive. The seller of volatility should not try to intercede when such events
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or rumors are occurring.
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