40 lines
2.4 KiB
Plaintext
40 lines
2.4 KiB
Plaintext
820 Part VI: Measuring and Trading VolatHity
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The reason that this approach has merit is that one never knows how low volatil
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ity can go, and more important, how high it can get. It was mentioned that the same
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sort of approach works well for other sentiment indicators, the put-call ratio, in par
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ticular. During the bull market of the 1990s, the equity-only put-call ratio generally
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ranged between about 30 and 55. Thus, some traders became accustomed to buying
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the market when the put-call ratio reached numbers exceeding 50 (high put-call
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ratio numbers are bullish predictors for the market in general). However, when the
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bull market ended, or at least faltered, the put-call ratios zoomed to heights near 70
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or 75. Thus, those using a static approach (that is, "Buy at 50 or higher") were buried
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as they bought too early and had to suffer while the put-call ratios went to new all
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time highs. A trend reversal approach would have saved them. It is a more dynamic
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procedure, and thus one would have let the put-call ratio continue to rise until it
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peaked. Then the market could have been bought.
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This is exactly what reading the volatility chart is about. Rather than relying on
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past data to indicate where the absolute maxima and minima of movements might
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occur, one rather notes that the volatility data is at extreme levels ( 1st percentile or
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100th percentile) and then watches it until it reverses direction. This is especially
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useful for options sellers, because it avoids stepping into the vortex of massive option
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FIGURE 39-1.
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Chart of the trend of implied volatility.
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XYZ
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,J'
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········································ · ························ ....................... ··················· 50. 0
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... · ····················· 40. 0
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Implied Volatility I/vi A r
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···-····························· .. •·•······•·········-·············································-··vw•···················)·•······ 30. 0
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All-Time Volatility Low -
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, .... , ..... , .. ··················,·······~················
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t :t·•····•····· ...•. ':·LJJSL5~?.
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--;---··········•·:
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o, b ::r F f1 h j ::r
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34.000
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32.000
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30. 000
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28. 000
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26.000
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24.000
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22.000
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20. 000 |