36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
Chapter 39: VolatiDty Trading Techniques 821
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buying, where the buyers perhaps have inside information about some forthcominf
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corporate event such as a takeover. True, the options might be very expensive ( 10ot
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percentile), but there is a reason they are, and those with the inside information know
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the reason, whereas the typical volatility trader might not. However, if the volatility
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trader merely waits for a downturn in implied volatility readings before selling these
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options, he will most likely avoid the majority of trouble because the options will
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probably not lose implied volatility until news comes out or until the buyers give up
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(perhaps figuring that the takeover rumor has died).
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Volatility buyers don't face the same problems with early entry that volatility
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sellers do, but still it makes sense to wait for the trend of volatility to increase (as in
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Figure 39-1) before trying to guess the bottom in volatility. Just as it is usually fool
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hardy to buy a stock that is in a severe downtrend, so it may be, too, with buying
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volatility.
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A less useful approach would be to apply the same techniques to historical
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volatility charts, for such charts say nothing about option prices. See the next section
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for expansion on these thoughts.
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COMPARING HISTORICAL VERSUS HISTORICAL
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The above paragraphs summarize the three major ways that traders attempt to find
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options that are out of line. Sometimes, another method is mentioned: comparing
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current levels of historical volatility with past levels of the same measure, historical
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volatility. This method will be described, but it is generally an inferior method
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because such a comparison doesn't tell us anything about the option prices. It would
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do little good, for example, to find that current historical volatility is in a very low per
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centile of historical volatilities, only to learn later that the options are expensive and
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that perhaps implied volatility is even higher than historical volatility. One would nor
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mally not want to buy options in that case, so the initial analysis of comparing histor
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ical to historical is a wasted effort.
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Comparing current levels of historical volatility with past measures of historical
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volatility is sort of a backward-looking approach, since historical volatility involves
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strictly the use of past stock prices. There is no consideration of implied volatility in
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this approach. Moreover, this method makes the tacit assumption that a stock's
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volatility characteristics do not change, that it will revert to some sort of "normal" past
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price behavior in terms of volatility. In reality, this is not true at all. Nearly every stock
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can be shown to have considerable changes in its historical volatility patterns over
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time. |