45 lines
2.3 KiB
Plaintext
45 lines
2.3 KiB
Plaintext
Chapter 37: How Volatility Affects Popular Strategies 761
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tain the call's value over a 6-month time period is an increase in implied volatility to
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27%. Taken from the viewpoint of the option seller, this is perhaps most enlighten
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ing: If you sell a one-year (LEAPS) option and six months pass, during which time
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implied volatility increases from 20% to 27% - certainly quite possible -you will have
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made nothing! The call will still be selling for the same price, assuming the stock is
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still selling for the same price.
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Finally, it was mentioned earlier that implied volatility often explodes during a
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market crash. In fact, one could determine just how much of an increase in implied
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volatility would be necessary in a market crash in order to maintain the call's value.
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This is similar to the first example in this section, but now the stock price will be
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allowed to decrease as well. Table 37-5, then, shows what implied volatility would be
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required to maintain the call's initial value (a price of 4.64), when the stock price falls.
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The other factors remain the same: time remaining (3 months), striking price (100),
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and interest rate (5% ). Again, this table shows instantaneous price changes. In real
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life, a slightly higher implied volatility would be necessary, because each market crash
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could take a day or two.
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Thus, from Table 37-5, one could say that even if the underlying stock dropped
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20 points (which is 20% in this case) in one day, yet implied volatility exploded from
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20% to 67% at the same time, the call's value would be unchanged! Could such an
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outrageous thing happen? It has: In the Crash of '87, the market plummeted 22% in
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one day, while the Volatility Index ($VIX) theoretically rose from 36% to 150% in one
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day. In fact, call buyers of some $OEX options actually broke even or made a little
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money due to the explosion in implied volatility, despite the fact that the worst mar
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ket crash in history had occurred.
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If nothing else, these examples should impart to the reader how important it is
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to be aware of implied volatility at the time an option position is established. If you
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are buying options, and you buy them when implied volatility is "low," you stand to
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TABLE 37-5
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Stock Price
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100
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95
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90
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85
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80
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75
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70
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Implied Volatility Necessary for Call to Maintain Value
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20% (the initial parameters)
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33%
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44%
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55%
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67%
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78%
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89% |