28 lines
2.1 KiB
Plaintext
28 lines
2.1 KiB
Plaintext
CHAPTER 39
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Volatility Trading Techniques
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The previous three chapters laid the foundation for volatility trading. In this chapter,
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the actual application of the technique will be described. It should be understood
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that volatility trading is both an art and a science. It's a science to the extent that one
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must be rigorous about determining historical volatility or implied volatility, calculat
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ing probabilities, and so forth. However, given the vagaries of those measurements
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that were described in some detail in the previous chapters, volatility trading is also
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something of an art. Just as two fundamental analysts with the same information
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regarding earnings, sales projection, and so on might have two different opinions
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about a stock's fortunes, so also can two volatility traders disagree about the potential
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for movement in a stock.
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However, volatility traders do agree on the approach. It is based on comparing
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today's implied volatility with what one expects volatility to do in the future. As noted
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previously, one's expectations for volatility might be based on volatility charts, pat
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terns of historical volatility and implied volatility, or something as complicated as a
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GAR CH forecasting model. None of them guarantees success. However, we do know
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that volatility tends to trade in a range in the long run. Therefore, the approach that
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traders agree upon is this: If implied volatility is "low," buy it. If it's "high," sell it with
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caution. So simple: Buy low, sell high (not necessarily in that order). The theory
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behind volatility trading is that it's easier to buy low and sell high (or at least to deter
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mine what's "low" and "high") when one is speaking about volatility, than it is to do
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the same thing when one is talking about stock prices.
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Most of the time, implied volatility will not be significantly high or low on any
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particular stock, futures contract, or index. Therefore, the volatility trader will have
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little interest in most stocks on any given day. This is especially true of the big-cap
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stocks, the ones whose options are most heavily traded. There are so many traders
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