38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
Chapter 39: Volatility Trading Techniques 819
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ly not much different from the GARCH approach, which is considered to be highly
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advanced. When one views the volatility chart, he is not looking for chart patterns like
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technical analysts might do with stock charts: support, resistance, head-and-shoul
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ders, flags, pennants, and so on. Rather, he is merely looking for the trend of volatil
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ity to change.
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This is a valid approach in the use of many indicators, particularly sentiment
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indicators, that can go to extreme levels. By waiting for the trend to change, the user
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is not subjecting himself to buying into the midst of a downtrend in volatility, nor sell
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ing into the midst of a steep uptrend in volatility.
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Example: Suppose a volatility trader has determined that the current level of implied
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volatility for XYZ stock is in the 1st percentile of all past readings. Thus, the options
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are as cheap as they've ever been. Perhaps, though, the overall market is experienc
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ing a very dull period, or XYZ itself has been in a prolonged, tight trading range -
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either of which might cause implied volatility to decline steadily and substantially.
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Having found these cheap options, he wants to buy volatility. However, he has no
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guarantee that implied volatility won't continue to decline, even though it is already
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as cheap as it's ever been.
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If he follows the technique of waiting for a reversal in the trend of implied
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volatility, then he would keep an eye on XYZ's implied volatility daily until it had at
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least a modest increase, something to indicate that option buyers have become more
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interested in XYZ's options. The chart in Figure 39-1 shows how this situation might
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look.
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There are a number of items marked on the chart, so it will be described in
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detail. There are two graphs in Figure 39-1: The top line is the implied volatility
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graph, while on the bottom is the stock price chart. The implied volatility chart shows
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that, near the first ofJune, it made new all-time lows near 28% (i.e., it was in the 0th
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percentile of implied volatility). Hence, one might have bought volatility at that
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point. However, it is obvious that implied volatility was in a steep downtrend at that
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time, so the volatility trader who reads the charts might have decided to wait for a
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pop in volatility before buying. This turned out to be a judicious decision, because
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the stock went nowhere for nearly another month and a half, all the while volatility
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was dropping. At the right of the chart, implied volatility has dropped to nearly 20%.
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The solid lines on the two graphs indicate the data that is known about the
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implied volatility and price history of XYZ. The dotted lines indicate a scenario that
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might unfold. If implied volatility were to jump ( and the stock price might jump, too),
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then one might think that the trend of implied volatility was no longer down, and he
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would then buy volatility. |