37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
832 Part VI: Measuring and Trading Volatility
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moved two or three times that far with great frequency. Finally, there is a continu
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ity to the points on the histogram: There are some y-axis data points at almost all
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points on the x-axis (between the minimum and maximum x-axis points). That is
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good, because it shows that there has not been a clustering of movements by XYZ
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that might have dominated past activity.
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As for what is not a "good" histogram, we would not be so enamored of a his
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togram that showed a huge cluster of points near and between the "-1" and 'T' points
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on the X-axis. We want the stock to have shown an ability to move farther than just the
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break-even distance, if possible. As an example, see Figure 39-5, which shows a stock
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whose movements rarely exceed the "-1" or "+l" points, and even when they do, they
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don't exceed it by much. Most of these would be losing trades because, even though
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the stock might have moved the required percentage, that was its maximum move
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during the 10-month period, and there is no way that a trader would know to take
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profits exactly at that time. The straddles described by the histogram in Figure 39-5
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should not be bought, regardless of what the previous analyses might have shown.
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Nor would it be desirable for the histogram to show a large number of move
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ments above the "+3" level on the histogram, with virtually nothing below that. Such
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a histogram would most likely be reflective of the spiky, Internet-type stock activity
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that was referred to earlier as being unreasonable to expect that it might repeat itself.
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In a general sense, one doesn't want to see too many open spaces on the histogram's
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X-axis; continuity is desired.
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If the histogram is a favorable one, then the volatility analysis is complete. One
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would have found mispriced options, with a good theoretical probability of profit,
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whose past stock movements verify that such movements are feasible in the future.
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ANOTHER APPROACH?
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After having considered the descriptions of all of these analyses, one other approach
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comes to mind: Use the past movements exclusively and ignore the other analyses
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altogether. This sounds somewhat radical, but it is certainly a valid approach. It's
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more like giving some rigor to the person who "knows" IBM can move 18 points and
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who therefore wants to buy the straddle. If the histogram (study of past movements)
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tells us that IBM does, indeed, have a good chance of moving 18 points, what do we
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really care about the relationship of implied and historical volatility, or about the cur
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rent percentiles of either type of volatility, or what a theoretical probability calcula
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tor might say? In some sense, this is like comparing implied volatility (the price of the
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straddle) with historical volatility (the history of stock price movements) in a strictly
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practical sense, not using statistics. |