Add training workflow, datasets, and runbook
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724 Part VI: Measuring and Trading Volatility
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Even though a myriad of strategies and concepts have been presented so far, a com
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mon thread among them is lacking. The one thing that ties all option strategies
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together and allows one to make comparative decisions is volatility. In fact, volatility
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is the most important concept in option trading. Oh, sure, if you're a great picker of
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stocks, then you might be able to get by without considering volatility. Even then,
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though, you'd be operating without full consideration of the main factor influencing
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option prices and strategy. For the rest of us, it is mandatory that we consider volatil
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ity carefully before deciding what strategy to use. In this section of the book, an
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extensive treatment of volatility and volatility trading is presented. The first part
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defines the terms and discusses some general concepts about how volatility can - and
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should - be used. Then, a number of the more popular strategies, described earlier
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in the book, are discussed from the vantage point of how they perform when implied
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volatilities change. After that, volatility trading strategies are discussed - and these
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are some of the most important concepts for option traders. A discussion is present
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ed of how stock prices actually behave, as opposed to how investors perceive them to
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behave, and then specific criteria and methodology for both buying and selling
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volatility are introduced.
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The information to be presented here is not overly theoretical. All of the con
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cepts should be understandable by most option traders. Whether or not one chooses
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to actually "trade volatility," it is nevertheless important for an option trader to under
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stand the concepts that underlie the basic principles of volatility trading.
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WHY TRADE
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11
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THE MARKET"?
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The "game" of stock market predicting holds appeal for many because one who can
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do it seems powerful and intelligent. Everyone has his favorite indicators, analysis
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techniques, or "black box" trading systems. But can the market really be predicted?
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And if it can't, what does that say about the time spent trying to predict it? The
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answers to these questions are not clear, and even if one were to prove that the mar
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ket can't be predicted, most traders would refuse to believe it anyway. In fact, there
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may be more than one way to "predict" the market, so in a certain sense one has to
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qualify exactly what he is talking about before it can be determined if the market can
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be predicted or not.
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The astute option trader knows that market prediction falls into two categories:
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(1) the prediction of the short-term movement of prices, and (2) the prediction of
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volatility of the underlying. These are not independent predictions. For example,
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anyone who is using a "target" is trying to predict both. That's pretty hard. Not only
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do you have to be right about the direction of prices, but you also have to be able to
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