Add training workflow, datasets, and runbook
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Expected Implied Volatility
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Although there is a great deal of science that can be applied to calculating
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expected actual volatility, developing expectations for implied volatility is
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more of an art. This element of an option’s price provides more risk and
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more opportunity. There are many traders who make their living distilling
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direction out of their positions and trading implied volatility. To be
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successful, a trader must forecast IV.
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Conceptually, trading IV is much like trading anything else. A trader who
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thinks a stock is going to rise will buy the stock. A trader who thinks IV is
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going to rise will buy options. Directional stock traders, however, have
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many more analysis tools available to them than do vol traders. Stock
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traders have both technical analysis (TA) and fundamental analysis at their
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disposal.
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Technical Analysis
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There are scores, perhaps hundreds, of technical tools for analyzing stocks,
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but there are not many that are available for analyzing IV. Technical
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analysis is the study of market data, such as past prices or volume, which is
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manipulated in such a way that it better illustrates market activity. TA
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studies are usually represented graphically on a chart.
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Developing TA tools for IV is more of a challenge than it is for stocks.
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One reason is that there is simply a lot more data to manage—for each
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stock, there may be hundreds of options listed on it. The only practical way
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of analyzing options from a TA standpoint is to use implied volatility. IV is
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more useful than raw historical option prices themselves. Information for
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both IV and HV is available in the form of volatility charts, or vol charts.
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(Vol charts are discussed in detail in Chapter 14.) Volatility charts are
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essential for analyzing options because they give more complete
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information.
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To get a clear picture of what is going on with the price of an option (the
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goal of technical analysis for any asset), just observing the option price does
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not supply enough information for a trader to work with. It’s incomplete.
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For example, if a call rises in value, why did it rise? What greek contributed
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