29 lines
1.9 KiB
Plaintext
29 lines
1.9 KiB
Plaintext
822 Part VI: Measuring and Trading Volatility
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Consider the historical volatilities of one of the wilder stocks of the tech stock
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boom, Rambus (RMBS). Historical volatilities had ranged between 50% and ll0%,
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from the listing of RMBS stock, through February 2000. At that time, the stock aver
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aged a price of about $20 per share.
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Things changed mightily when RMBS stock began to rise at a tremendous rate
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in February 2000. At that time, the stock blasted to ll5, pulled back to 35, made a
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new high near 135, and then collapsed to a price near 20. Hence, the stock itself had
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completed a wild round-trip over the two-year period. See Figures 39-2 and 39-3 for
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the stock chart and the historical volatility chart of RMBS over the time period in
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question.
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As this happened, historical volatility skyrocketed. After February 2000, and
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well into 2001, historical volatility was well above 120%. Thus it is clear that the
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behavior patterns of Rambus changed greatly after February 2000. However, if one
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had been comparing historical volatilities at any time after that, he would have erro
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neously concluded that RMBS was about to slow down, that the historic volatilities
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were too high in comparison with where they'd been in the past. If this had led one
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to sell volatility on RMBS, it could have been a very expensive mistake.
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While RMBS may be an extreme example, it is certainly not alone. Many other
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stocks experienced similar changes in behavior. In this author's opinion, such behav
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ior debunks the usefulness of comparing historical volatility with past measures of
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historical volatility as a valid way of selecting volatility trades.
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FIGURE 39-2.
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Historical volatilities of RMBS.
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RMBS 19.000 17.250 18.875 20010410
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............ ······· 60.0
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· ·················· 50.0
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...... ······· 40. 0
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39 M i·h··-:; s ·~ s a ~--f:i--·5--r;;····~··h s·s- A s a N □ s--r·;; r |