36 lines
2.6 KiB
Plaintext
36 lines
2.6 KiB
Plaintext
800 Part VI: Measuring and Trading Volatility
|
||
of success. If it turns out that volatility is higher during the life of the position, that
|
||
will be an added benefit to this position consisting of long options. So, in this exam
|
||
ple, he should use the 20-day historical volatility because it is the lowest of the four
|
||
choices that he has.
|
||
Similarly, if one is considering the sale of options or is taking a position with a
|
||
negative vega ( one that will be harmed if volatility increases), then he should use the
|
||
highest historical volatility when making his probability projections. By so doing, he
|
||
is again being conservative. If the strategy in question still looks good, even under an
|
||
assumption of high volatility, then he can figure that he won't be unpleasantly sur
|
||
prised by a higher volatility during the life of the position.
|
||
There have been times when a 100-day lookback period was not sufficient for
|
||
determining historical volatility. That is, the underlying has been performing in an
|
||
erratic or unusual manner for over 100 days. In reality, its true nature is not described
|
||
by its movements over the past 100 days. Some might say that 100 days is not enough
|
||
time to determine the historical volatility in any case, although most of the time the
|
||
four volatility measures shown above will be a sufficient guide for volatility.
|
||
When a longer lookback period is required, there is another method that can be
|
||
used: Go back in a historical database of prices for the underlying and compute the
|
||
20-day, 50-day, and l 00-day historic volatilities for all the time periods in the data
|
||
base, or at least during a fairly large segment of the past prices. Then use the medi
|
||
an of those calculations for your volatility estimates.
|
||
Example: XYZ has been behaving erratically for several months, due to overall mar
|
||
ket volatility being high as well as to a series of chaotic news events that have been
|
||
affecting XYZ. A trader wants to trade XYZ's options, but needs a good estimate of
|
||
the "true" volatility potential of XYZ, for he thinks that the news events are out of the
|
||
way now. At the current time, the historical volatility readings are:
|
||
20-day historical: 130%
|
||
50-day historical l 00%
|
||
100-day historical 80%
|
||
However, when the trader looks farther back in XYZ's trading history, he sees
|
||
that it is not normally this volatile. Since he suspects that XYZ's recent trading histo
|
||
ry is not typical of its true long-term performance, what volatility should he use in
|
||
either an option model or a probability calculator?
|
||
Rather than just using the maximum or minimum of the above three numbers
|
||
(depending on whether one is buying or selling options), the trader decides to look |