44 lines
1.4 KiB
Plaintext
44 lines
1.4 KiB
Plaintext
906 Part VI: Measuring and Trading Volatility
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Implied deviation = sqrt (sum of differences from mean) 2/(# options - 1)
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XYZ:50
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Implied
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Option Volatility
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October 45 call 21%
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November 45 call 21%
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January 45 call 23%
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October 50 call 32%
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November 50 call 30%
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January 50 call 28%
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October 55 call 40%
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November 55 call 37%
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January 55 call 34%
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Average: 30.44%
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Sum of ( difference from avg)2 = 389.26
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Implied deviation = sqrt (sum of diff)2/(# options - 1)
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= sqrt (389.26 I 8)
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= 6.98
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Difference
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from Average
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-9.44
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-9.44
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-7.44
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+ 1.56
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-0.44
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-2.44
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+9.56
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+6.56
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+3.56
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This figure represents the raw standard deviation of the implied volatilities. To
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convert it into a useful number for comparisons, one must divide it by the average
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implied volatility.
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P d . . Implied deviation ercent eV1at10n = A . 1. d verage imp ie
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= 6.98/30.44
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= 23%
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This "percent deviation" number is usually significant if it is larger than 15%.
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That is, if the various options have implied volatilities that are different enough from
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each other to produce a result of 15% or greater in the above calculation, then the
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strategist should take a look at establishing neutral spreads in that security or futures
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contract.
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The concept presented here can be refined further by using a weighted average
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of the implieds ( taking into consideration such factors as volume and distance from the
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striking price) rather than just using the raw average. That task is left to the reader. |